Economists note that recipients of unemployment aid tend to spend that money quickly, giving a lift to the economy. The expiration of the extended benefits would cut economic growth by about 0.2 percentage point next year, the Congressional Budget Office estimates.
The gravest scenario would be if the budget talks collapsed, negotiators went home and the tax increases and spending cuts appeared to be permanent.
In that case, Macroeconomic Advisors, a forecasting firm, warns that the Dow Jones industrial average could plunge up to 2,000 points within days. Businesses would turn gloomier in anticipation of Americans paying higher taxes. Retailers would order fewer cars, appliances and clothing. Consumers' confidence would likely plummet, followed by their spending.
The economy would shrink at an annual rate of 0.6 percent in the first three months of 2013, estimates Joel Prakken, an economist at Macroeconomic Advisors. That compares with an estimated 1.9 percent growth rate if a deal is reached.CBO forecasts that the economy would decline 0.5 percent in the first half of 2013 and fall into recession. The unemployment rate would rise to 9.1 percent from the current 7.7 percent. Most economists are counting on fear of such a disaster to prod Congress and the White House to make a deal. But analysts expect the Social Security tax cut and extended unemployment benefits to end. Those two changes would lower growth by 0.7 percentage point next year, the CBO estimates. Under that scenario, Social Security taxes would revert back to 6.2 percent on the first $110,000 of income, up from 4.2 percent. The increase would cost someone earning $50,000 an extra $1,000 a year, or nearly $20 a week. Some consumers have been getting nervous. Mike Duke, CEO of Wal-Mart Stores Inc., said Tuesday that in a poll last month of the store's shoppers, an overwhelming majority were aware of the threat of high taxes from the cliff. And some said it would lead them to cut back their holiday buying, Duke said. Wal-Mart, the world's largest retailer, is considered an economic bellwether.