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Nov 06, 2012 | 09:49 PM

First it was a fiscal ‘cliff.’ Now it’s a ‘steep slope.’

Tags  U.S. ecnomy, deficit reduction, sequestration, NAM, National Association of Manuacturers, Jeff Werling, Jay Timmons, U.S. deficit NEMA

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Sooner or later, everyone pays the proverbial piper. So why should the U.S. economy be any different?

In a 25-page report released 66 days before the American economy is ticketed to dive over a fiscal cliff—and 10 days before the presidential election—the National Association of Manufacturers (NAM) went a step beyond sizing up the toll the mandated across-the-board spending cuts and federal tax increases could take on the national economy and insisted instead that the damage has already begun.

The report, titled Fiscal Shock: America’s Economic Crisis, was authored by Jeff Werling, executive director of Inforum, the Interindustry Forecasting Project at the University of Maryland, and a international and industry economist, who served previous stints with the National Electrical Manufacturers Association (NEMA) and the Manufacturers Alliance for Productivity and Innovation (MAPI). Werling uses what he describes as Inforum’s LIFT model to derive an estimate of the magnitude and timing of the economic impact of allowing the scheduled spending cuts and tax increases to go into effect on Jan. 1, 2013, as scheduled.

Predictably, the outcome, absent legislative action, is not pretty, starting with a total fiscal contraction of $500 billion, or about 3.2 percent of GDP. If Washington opts to fiddle while the economy burns, the report cautions that:

• The economy will almost certainly experience a recession in 2013 and significantly slower growth in 2014.

• From 2012 to 2015, the economy will lose 12.8 percent of the average annual real GDP it could have attained with moderate growth, sapping critical resources from all economic sectors.

• Job losses will be dramatic, with the fiscal contraction resulting in almost 6 million jobs lost by 2014.

• Households will take a big hit. Real personal disposable income will drop almost 10 percent by 2015.

• Manufacturers of consumer goods and defense contractors likely will see large and durable contractions in their industries.

• It will take almost a decade for economic activity and employment levels to recover from the fiscal shock.

In a bit of an about-face on the timing and severity of the contraction, the report suggests that rather than waiting until the clock strikes midnight on Dec. 31, wary consumers and businesses likely have already reduced consumption and investment in 2012. As a result, rather than falling off a cliff, the report predicts the economy will actually slide down a steep slope that started sometime in 2012. This smoothing behavior implies that the sudden change in fiscal policy will not produce a dramatic contraction at the outset of 2013. Instead, the report estimates that the threat of fiscal contraction has already cut 0.6 percentage points off 2012 GDP growth.

Werling’s LIFT model does see some light at the end of the tunnel, however. By 2016, the situation is expected to improve as economic recovery takes hold.

Deficit reduction is seen likely to lead to lower capital and labor costs, a lower fiscal burden and lower interest rates. "U.S. businesses will respond by unlocking funds reserved for deleveraging and should become more competitive in international trade, especially in export activity," the report observes.

The irony, of course, and one that isn’t lost on NAM president and chief executive officer Jay Timmons, is that the fiscal cliff is entirely self-inflicted. "We have put ourselves in a situation where our economic and national security is threatened by our own hand," he said in a statement. "Yet, because it is self-inflicted, we have the ability to fix this and put the United States on the right track."

To do that, Timmons urged the president and Congress to address the unsustainable entitlement programs driving our national debt, halt the looming tax increases and sequestration that will "push our nation off the fiscal cliff" and enact pro-growth tax reform that will "enable manufacturers to continue to lead our economy." (jisenberg@amm.com)

Author

Jo Isenberg

Jo Isenberg is executive editor of AMM. She has been covering the steel industry for over 30 years and has served as editor of AMM for the last 11 years – the most successful decade in the publication’s long history.