Inside the Numbers

Bigger than the Election?

 

Avery Untitled 1By Avery Vise

avise@randallreilly.com

 

 

The business community has focused so heavily on the presidential election — perhaps too much, as discussed last month — that nobody seems to talk about the so-called “fiscal cliff.”

You probably have heard the term at least once or twice and even if you don’t know what it is you likely have figured out that most people think it’s a bad thing.

So here’s the deal: The fiscal cliff is a term describing the fact that without any congressional action two things will happen at the beginning of January.

First, a series of tax cuts, credits and deductions originally enacted in 2001 and 2003 (the so-called Bush tax cuts) and in 2009 (individual and business tax benefits included in the stimulus act) will expire, leading to a significant increase in tax payments compared to today.

Second, a law passed by Congress in 2011 to reduce the federal budget deficit will kick in, forcing reductions in virtually all federal spending programs, including both defense and domestic.

These major changes, which resulted from separate political deals that happen to expire at the same time, would, according to the Congressional Budget Office, cut the federal budget deficit in fiscal 2013 to $641 billion — down nearly half a trillion dollars from the $1.12 trillion deficit in fiscal 2012, which ended Sept. 30.

How Congress handles the ‘fiscal cliff’ could change the economy.

If you believe the government should live within its means, perhaps you think this would be a good thing. But there almost certainly would be a very heavy price to pay.

“Such fiscal tightening will lead to economic conditions in 2013 that will probably be considered a recession,” the Congressional Budget Office said a couple of months ago.

CBO estimates if taxes rise and spending drops by such a degree, real Gross Domestic Product would decline by 0.5 percent between the fourth quarter of 2012 and the fourth quarter of 2013. For you, a recession and higher unemployment means less freight, which probably means fewer parts purchased and less maintenance and repair work.

Heading off the fiscal cliff would be especially unfortunate given that many key indicators are showing steady if not necessarily dramatic improvement. Home buying and home building is up. Manufacturing is stable. And the employment situation is improving. Expect those gains to end without a deal.

With such a crisis looming, Congress obviously has put aside everything else and is focusing on nothing but solving this enormous problem. Yes, I’m joking.

If you are reading this before Nov. 13, Congress isn’t even in session and hasn’t been since September. Lawmakers have been home campaigning to keep their jobs because, after all, they have been doing such a wonderful job.

Clearly a major fix is in order, but Congress doesn’t have much time to fix it, and there really are no signs that it plans to even try. Most observers think there will be some kind of deal that will do little more than keep everything the way it is for a bit longer.

We really shouldn’t expect anything more than that. The fiscal cliff exists because Congress decided in 2010 not to make a decision on taxes and in 2011 not to make a decision on either spending or taxes.

The compromise probably will involve some minor spending cuts, just for show, and an extension of everything else for six months or maybe a year. This would be better than strolling off the cliff, but it’s not a desirable outcome.

Many fleets say that uncertainty is holding back their own investments and those of their customers.

If Congress just pushes everything off for six months, that uncertainty remains. If Congress simply can’t reach a deal then it should at least delay the fall off the cliff for a few years or more.

We should expect more than that from our elected representatives, but that’s probably the most we can hope for.

Avery Vise is executive director, trucking research and analysis for Randall-Reilly Business Media and Information.

 

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