Near Term Economic Growth – A Fiscal Cliffhanger


The Bureau of Economic Analysis (BEA) released the second estimate of real GDP growth for the third quarter of 2012. Growth was revised upward to a seasonally adjusted annual rate of 2.7%, up from 2.0% in the advance estimate last month. Real GDP grew at a 1.3% pace in the second quarter. The revision was largely due to upward revisions to inventory investment and exports. It’s a positive signal that growth has increased from the second quarter, but less encouraging that the upward revisions came from inventory and exports, factors unlikely to make a large contribution to growth in the fourth quarter.

But the source of the greatest uncertainty about near term economic growth is the so-called fiscal cliff, the combination of tax and spending policies scheduled to take effect in January 2013 absent some agreement between the Administration and Congress on an alternative. The politics will be messy but the impact on the economic outlook is clear enough. The Congressional Budget Office (CBO) estimated earlier this year that the full effect of these policies would lower real GDP growth in 2013 by roughly 4 percentage points, from 4.4% growth to 0.5 %, relative to growth under a continuation of current policies.

Our forecast assumes that the fiscal cliff will be largely avoided, but that some fiscal tightening will occur and that the ongoing uncertainty surrounding the ultimate resolution of this issue will restrain growth in the coming quarters. As a result, our forecast calls for a deceleration in growth next quarter and in the first half of 2013 before accelerating in the second half of the year and into 2014.

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