the fiscal cliff
The current political debate over the impending fiscal cliff has a certain, almost hypnotic, attraction.
It’s great theater.
Ben Bernanke has added to the drama by making it clear that, in the Federal Reserve’s view, the stakes are high: without taking action to mitigate the sharp fiscal contraction pencilled in by Washington to begin on January 1st, a six-to nine-month recession will ensue, one million+ more workers will lose their jobs, and the return to economic normal for the US will be pushed back by two years to 2018.
(Personally, I think the economic positions of both parties are rooted in a bygone era and don’t address the realities of the world of even a quarter-century ago, let alone today. And we US citizens have so far followed the lead of Japan of reelecting the same intellectually threadbare patronage politicians who happily got us into this mess. But the scary Japan parallels are a story for another day.)
Let’s get practical instead.
Looking at today’s stock market situation, either we’ll go over the fiscal cliff or we won’t. Assuming we don’t–which is my base case–what conclusions can we draw about how 2013 will likely play out?
implications for the US economy in 2013
I think there are two main ones:
1. Businesses, which have been preparing for the worst for some time now, will breathe a sigh of relief and loosen the purse strings a bit. This will mean somewhat higher capital spending and a return to hiring at a somewhat higher rate. I think the former is unambiguous good news for tech and telecom companies. The latter is less clear-cut.
Let’s say that industry in the US begins to hire 25,000 more workers per month, starting in January. That means 300,000 more people with jobs next year. And because we’re already hiring at a rate that absorbs new entrants into the workforce, additional hiring should cut into the large number of long-term unemployed. That’s a good thing. On the other hand, an extra 300,000 workers won’t make a noticeable difference in aggregate spending in a workforce of 150 million+. It amounts to a 0.2% gain.
2. On the surface, consumer spending seems to have been almost completely unaffected by worries about the fiscal cliff. Black Friday and Cyber Monday set spending records, after all.
Two other plusses: the price of houses–the single largest source of wealth for most US families–is trending upward for the first time in half a decade. And the price of oil is headed down. Both developments should add to holiday cheer.
One might interpret robust holiday spending as a last hurrah before the start of adjustment to lower after-tax incomes. I tend to think, with no hard evidence–only anecdotes, that the adjustment to lower incomes has already begun. Tiffany, for example, has recently seen an unexpected dropoff in sales to US customers–concentrated in less affluent “aspirational” buyers. Fast food restaurants like McDonald’s and casual dining like Darden have seen US customer slowdowns, too. This season’s ratings for traditional TV shows are also off–a lot.
If I’m right in assuming that at least part of the payroll tax is re-instituted for next year and that overall pretax consumer income will be at best flat because of this, then substitution of lower-priced alternatives for more expensive goods–like the ones cited in the past paragraph–will come into full flower. This will be doubly true as/when consumers figure out that the fiscal cliff discussions are all about the glide path to lower household incomes, not about a remedy for the fact of lower incomes.
Substitution can take many forms. There may be crosscurrents as well. All of this is hard to predict. In general the consumer mindset I’m envisioning–and which I think is already emerging now–will accelerate the pace of technological change. Maybe the decline in readership of traditional newspapers goes into a higher gear. Maybe an increasing number of people unplug from cable. The key thing, in my mind, is to be alert for such changes and to react to them quickly.
stock market implications
1. Half the earnings of US-listed companies come from outside the US. With emerging economies, especially China, beginning to perk up, it seems to me investors should tilt their actively managed holdings toward firms with large Pacific and/or Latin American exposure.
2. Look downmarket, away from luxury goods, for US consumer exposure.
3. Look for beneficiaries of technological change. They’re typically more resistant to economic headwinds than other businesses. They may also provide lower-cost alternatives to traditional goods/services, which may find much faster than normal acceptance in slow-growth times.
More about this in my 2013 strategy.