Fiscal Cliff 2013 Fears Already Stifling U.S. Economy

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Fiscal cliff 2013 remains poised to throw the struggling U.S. economy into recession when tax increases and spending cuts kick in Jan. 1 - which has scared companies away from spending any more money than they have to this year.

Even worse, the country's fiscal cliff fears have increased as a bevy of fresh data has been more dismal than economists expected. Most recently, July's U.S. jobs report released last Friday showed the U.S. unemployment rate ticked up to 8.3% from 8.2% in June.

Fiscal cliff's total impact amounts to more than $600 billion, or 4% of U.S. gross domestic product (GDP), if Congress fails to act. The result, the Congressional Budget Office projects, is that the economy will contract by 1.3% in the first half of 2013.

That means companies will lock up extra cash and rein in investments to prepare for economic uncertainty in 2013.

"We think it is only a matter of time before corporations more broadly slow their spending plans," Bank of America Corp. (NYSE: BAC) analysts wrote in a note to clients last month.

As scores of companies are in the midst of making budgets, they are not taking a wait-and-see stance. They are cutting out and cutting back-now.

Fiscal Cliff 2013: Not an Overstated Danger

A July survey conducted by Morgan Stanley (NYSE: MS) showed that some 40% of companies cite the fiscal cliff as a major reason for spending restrictions, a number that is expected to rise when the survey is conducted again this month.

"Economists generally overstate the effects of uncertainty on spending, but in this case it does seem to be significant. It's at the macro and microeconomic levels," Vincent Reinhart, Morgan Stanley's chief U.S. economist, told The New York Times.

Timothy H. Powers, CEO of electrical products maker Hubbell, told The Times his company has cancelled orders, delayed factory upgrades and halted hiring.

"The fiscal cliff is the primary driver of uncertainty, and a person in my position is going to make a decision to postpone hiring and investments," said Powers. "We can see it in our order patterns, and customers are delaying. We don't have to get to the edge of the cliff before the damage is done."

Now companies are issuing lower earnings guidance for the second half of 2012.

"We're in economic purgatory," Alexander M. Cutler, CEO of Eaton Corp. (NYSE: ETN), a dominant player in the industrial equipment sector, told The Times. "In the nondefense, nongovernment sectors, that's where the caution is creeping in. We're seeing it when we talk to dealers, distributors and users."

Politics Heightens Fiscal Cliff Fears

Congress is not expected to let fiscal cliff 2013 come to fruition in full, but as the country gears up for Election 2012, the back-and-forth battle over what's best for the U.S. economy has yet to provide any guidance for corporations.

"The fiscal cliff is not just a year end story," Michelle Meyer, along with her colleagues at Bank of America Merrill Lynch, penned in a note to clients. "We expect the uncertainty shock to be realized in the coming months, escalating before the election."

James Lebenthal of Lebenthal Asset Management told CNBC that growth has been hampered in the U.S., and the sluggish environment won't find any reprieve from the "political rhetoric leading up to the election."

"This summer is going to be tricky," he said.

Indeed, as we start the final full month of summer, there's no indication of how the fiscal cliff 2013 fight will end.

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