Why Recession 2013 Could Hit Regardless of Fiscal Cliff Deal

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Stalled fiscal cliff negotiations have fueled concerns the U.S. could face a recession in 2013 if the country fails to avert the cliff.

But recession 2013 may be on the way regardless of what happens with the fiscal cliff talks.

The latest sign of an economic downturn came Tuesday in a U.S. Commerce Department report showing imports to the United States have fallen two consecutive months after dropping 8.4% in the third quarter and 2% the previous quarter.

Robert Brusca, chief economist at FAO Economics, told MarketWatch when the economy weakens, imports decline quickly.

Brusca called the latest figures a "red flag" and said a 2013 recession is a "real risk."

The last time imports declined for two quarters was in 2009, at the end of a four-quarter decrease in imports during the Great Recession.

More Signs of Recession 2013

Signs of a possible recession in 2013 date to August when the Commerce Department reported orders for durable goods fell 13.2% and inflation-adjusted personal income dipped 0.3%.

Now Morgan Stanley (NYSE: MS) has released grim projections for 2013. The bank said the global economy could see a "twilight zone" of little growth next year, which will get worse if policymakers fail to reach a fiscal cliff deal. MS analysts forecast a full-blown recession in 2013 if we go over the cliff, with the gross domestic product likely to shrink 2%.

In a recent report, Morgan Stanley wrote, "More than ever, the economic outlook hinges upon the action taken or not by governments and central banks."

Falling over the fiscal cliff, a distinct possibility, would usher in a contraction in U.S. GDP for the first three quarter of 2013, Morgan Stanley analysts said.

With just 11 days left for Congress to hammer out some sort of agreement, a deal to avert the fiscal cliff entirely looks highly unlikely.

And even if lawmakers reach an agreement, the U.S. economy still faces many hurdles next year.

Individuals and business have already begun bracing for the worst.

"Cliff-related uncertainty already has arrested business spending and prospects of a delayed solution are eroding financial conditions well ahead of yearend," Citigroup Inc. (NYSE: C) economist Robert DiClemente told Forbes last month.

Should fiscal cliff discussions linger into the first part of next year, the U.S. economy and job growth are likely to suffer.

And nearly all taxpayers will have to pay the government more next year. Workers will receive less in their paychecks as the payroll tax holiday likely expires, and higher income earners will face higher individual income tax rates and tighter limits on deductions and other tax breaks.

Global Slowdown Expected

At the same time, global woes will affect the U.S. economy.

The International Monetary Fund (IMF) warned in October when it slashed its growth forecasts for the second time since April that the worldwide economic slowdown is accelerating.

If U.S. and European policymakers continue to drag their heels on fixing what ails their economies, the slowdown could grow more severe.

In its World Economic Outlook, the IMF questioned if the sluggish global economic environment was to be expected as struggling nations claw their way to a recovery or if the downturn has a "more lasting component."

The IMF called America's fiscal cliffhanger and Europe's sovereign debt mess the most pressing fiscal global issues.

It forecasts the global economy will remain "very fragile" in the immediate future and notes it will take time to fix the Eurozone issues.

For the United States, the IMF says "urgent policy priorities" should be averting a fall over the fiscal cliff, which the fund says could trim more than 4% off the GDP in 2013, stalling economic growth.

Even if the United States avoids falling over the fiscal cliff and agrees to raise its debt ceiling, Europe's tribulations will still have an adverse impact on the U.S. economy, and vice versa.

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  1. H. Craig Bradley | December 20, 2012

    FOLLOW THE MONEY TRAIL to PREDICT OBAMA'S SECOND TERM

    Figure out what's going on by "following the money", as usual. Lets start with public school teachers and their pension funds. In California, the Calif. Teachers Pension Fund is only 70% funded. This amount of underfunding means they probably can not meet their future pension obligations. Only higher contributions from teachers themselves or their respective school districts can alter this underfunding. By comparison, private pensions by comparison must be at least 80% funded by law.

    Of course, they could appeal to Washington for another trillion dollar stimulus bill (pencil ready) to tide them over for another year or so, but I would not count on that. Maybe the economy and stock markets will turn around and produce double digit gains again, saving everyone. Again, unlikely if not impossible. If teachers must contribute more, accept reduced pension benefits, or face layoffs, then less money will be available for consumption ( retail, housing, cars, etc.) – which is deflationary.

    The only logical conclusion is a period of deflation, particularly at the state level characterized by recession, deflation ( all assets go down in value), higher unemployment, and reduced tax revenues even with higher tax rates. Not much of a future for consumers and big spenders alike.

  2. bill | December 24, 2012

    The money is stopping in to many places, we have more millionaires then ever before which means less money for everybody else….the money dam is being built higher when it should be letting more money flow through….hence the rich getting richer and poor getting screwed

  3. freddy | December 28, 2012

    it would seems that we are headed over a cliff .republicans dont want to raise taxes on the top one percent because if they raise tax on them it wont trickel down to us lower class that ,they all have no problem taxing.im at the bottom of the gully waiting for them to get down here .bush tax cuts were posed to end any way this year i will also say demos won the white house so we have to kind of play nice really. all they are hurting is america ,making it less then what its worth so mister congress man or women while you stand on principal im down here ready to get back to work .and im sure you folks had a better christmas then most of poeple whom you are working for!

  4. peter | January 14, 2013

    When the sea is calm and steady thats when the biggest waves hit, and crush everything. I am begining to think same for the economy as well. ahh enough said life is to short drag on with this political crap which we all know never made any sense for the working man and always served the rich and there selfish interests. TAX THEM ALL!!!..haha and have a nice day.

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