By CHRISTOPHER S. RUGABER
WASHINGTON (AP) â¿¿ It's the scenario that's been spooking employers and investors and slowing the U.S. economy:
Congress and the White House fail to strike a budget deal by New Year's Day. Their stalemate triggers sharp tax increases and spending cuts. Those measures shrink consumer spending, stifle job growth, topple stock prices and push the economy off a "fiscal cliff" and into recession.
The reality may be a lot less bleak.
Even if New Year's passed with no deal, few businesses or consumers would likely panic as long as an agreement seemed likely soon. The tax increases and spending cuts could be retroactively repealed after Jan. 1.
And the impact of the tax increases would be felt only gradually. Most people would receive slightly less money in each paycheck.
"The simple conclusion that going off the cliff necessarily means a recession next year is wrong," says Lewis Alexander, an economist at Nomura Securities. "It will ultimately depend on how long the policies are in place."
It's always possible that negotiations between President Barack Obama and Republican congressional leaders will collapse in acrimony. The prospect of permanent tax increases and spending cuts could cause many consumers and businesses to delay spending, hiring or expanding.
But most economists expect a deal, if not by New Year's then soon after. Businesses and consumers will likely remain calm as long as negotiators seem to be moving toward an agreement.
"The atmosphere is more important than whether the talks spill" into next year, said Paul Ashworth, an economist at Capital Economics.
Here's why many are optimistic that a brief fall over the cliff wouldn't derail the economic recovery:
â¿¿ Though the fiscal cliff would cost the economy an estimated $671 billion for all of 2013, the tax hit for most people would be slight at first. The expiration of Social Security and income tax cuts would be spread throughout 2013. For taxpayers with incomes of $40,000 to $65,000, paychecks would shrink an average of about $1,500 next year but an average of just $130 in January, according to the nonpartisan Tax Policy Center.