NEW YORK (TheStreet) -- While President Obama and the beloved members of Congress are focused on the November elections, the looming "Fiscal Cliff" is of paramount importance to the economy.
As part of a grand bargain between both major parties and the president to raise the federal debt ceiling, the Budget Control Act of 2011 -- signed into law by President Obama in August 2011 -- a mandatory set of budget cuts, together with the expiration of tax cuts enacted when George W. Bush was president, and then extended in 2010, "will push the U.S. into a recession in the first half of 2013," according to KBW analyst Fred Cannon, unless Congress and the president once again kick the can down the road.
Since the only thing that matters to most members of Congress is the subsequent election cycle, it would seem most likely that another bill will be passed to prevent the federal spending cuts and to extend the tax cuts once again, but one never knows. The bitterness between the parties, together with the election results, could indeed push us over the fiscal cliff.
For income seeking investors, TheStreet recently covered the significant tax implications that will affect investors unless Congress extends the tax cuts, as well as several choices to maximize dividend income under various scenarios.KBW's "base-case economic outlook" assumes that Congress and the president will take the necessary actions to avoid the fiscal cliff, but Cannon said that even under that "even if the fiscal cliff is addressed by Congress, we believe that the December debate on the issue will be negative for consumer confidence and will slow spending." After that, assuming that we don't fall off the fiscal cliff, KBW expects the economy to "[reaccelerate] in 2013, ending the year with 2.2% GDP growth and the unemployment rate at 7.3%." "Under the fiscal cliff alternative scenario, we would expect the U.S. to fall into a recession in the first half of 2013, with negative GDP growth and the year ending with the unemployment rate at 9.1%," Cannon said, adding that "interest rates stay low under both scenarios, but in the fiscal cliff alternative, we would expect the 10-year Treasury yield to drop below 1% early in 2013."
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