Weekly Commentary: Fiscal Cliff

May 29, 2012

05.29.12

Last week U.S. equity markets posted modest gains with the Dow Jones up 0.7% and the S&P 500 up 1.7%. U.S. economic data was mixed. Positive – continued improvement in new and existing home sales and a 1.8% jump in FHFA home price index. Negative – April durable orders exhibited weakness pointing to softness in manufacturing.

This week we’ll see more housing data with the S&P/Case-Shiller 20-city home price index and pending home sales. Later we’ll get an update on the U.S. employment situation. Current consensus is for a nonfarm payroll increase of 150,000 jobs and the unemployment rate staying at 8.1%.

What is the U.S. “Fiscal Cliff?” In the first half of 2013 there are several tax policies set to expire such as the Bush-era tax cuts, payroll tax holiday, extended unemployment benefits, and the automatic spending and budget cuts mandated by Congress if lawmakers fail to reach deficit reduction goals.
Below is a chart from Goldman Sachs demonstrating the effects of fiscal policy on GDP Growth and 3 outcomes for 2013: 1. Extend all tax policies 2. Compromise 3. Fiscal Cliff which could result in a 4% reduction in gross domestic product.
We believe a compromise will be achieved.

“Politics is the art of postponing decisions until they are no longer relevant.”
– Henri Queuille