US Chmbr of Commerce: Fiscal Cliff Could Put U.S. In Recession

Author: Market News International | Category: News

By Kasra Kangarloo

WASHINGTON (MNI) – The across-the-board expiration of tax cuts and
spending cuts to take place at the end of the year — the so-called
“fiscal cliff” — could put the U.S. back into recession, according to
economists at the U.S. Chamber of Commerce.

Chief economist Martin Regalia, in a speech during the Chamber’s
quarterly economic briefing, noted that the recovery in the U.S. was
fragile enough to be derailed by either the “fiscal cliff” scenario or a
significant downturn in Europe.

“At growth rates of 1.5 to 2.0%, it doesn’t take much to push you
into recession,” Regalia said.

Economist Kate Warne put it more bluntly in her speech, stating
that “the instant austerity known as the fiscal cliff…of course would
put the economy into recession next year.”

The “fiscal cliff” scenario could deduct between 3.5 and 5.0
percentage points from GDP, according to Warne.

Warne added that Congress was not likely to pass legislation to
offset the combination of spending cuts and tax hikes before the
national election in November, which could result in market volatility
near the end of the year.

The GDP growth rate was reported as 1.5% for the second quarter in
the Commerce Department’s advanced report, after an upwardly revised
2.0% growth rate in the first quarter, a range which Regalia said could
be expected for the “near term.”

Regalia noted that he was not forecasting a recession absent an
external economic shock.

The low federal funds rate put in place by the Federal Reserve,
currently set at a target rate between 0.0 and 0.25 percent, have served
as a “buffer” against further economic turmoil, according to Warne.

Regarding the on-going fiscal crisis in Europe, Warne noted that
the cycle of a high-debtor nation such as Spain or Greece watching its
borrowing rates sky-rocket before being forced to ask for aid was likely
to continue for some time, though it would not have any meaningful
effect on U.S. growth.

Warne also noted that a Greek exit from the Eurozone, so long as it
was handled in a “strategic manner” that did not lead to a full-blown
crisis, could also leave the U.S. economy largely unscathed.

— Kasra Kangarloo is a reporter for Need to Know News