Resilient but Still Vulnerable
In recent months, improving employment, a surge in refinancing and firming home prices have all worked together to release some of the pent-up demand created by the "Great Recession." Higher confidence, predicated on better labor market conditions and the hope that housing has finally turned the corner, allowed consumers flush with extra cash from refinancing to spend rather than save those funds. Moody's estimates that some $20 billion in extra cash will be generated by refinancing alone in the second half of 2013.
In recent months, improving employment, a surge in refinancing and firming home prices have all worked together to release some of the pent-up demand created by the "Great Recession." on January 1, 2013. Statistical models suggest that the drag created by the fiscal cliff would shave somewhere between 3.5 percent and 4 percent from real GDP growth between fiscal year 2012 and fiscal year 2013; some of that has already occurred. The worst of the pain would be felt in the first half of the year because that is when the largest fiscal drag would appear. However, those statistics understate the actual costs associated with the blow to growth if we go over the fiscal cliff. The ramifications for confidence and the functioning of global financial markets would be huge if Washington were to actually engage in such an irresponsible act.
This is to say nothing of the devastation and disruption to spending caused by Superstorm Sandy. There would be no way to fully repair and rebuild the worst affected areas if the emergency funds needed from the federal government were not released on a timely basis. Stranger things have happened. Remember summer 2011's showdown over the debt ceiling, which brought the U.S. to the brink of defaulting on its debts.
Given the enormous risks we currently face, I decided to break with tradition and focus this report on the outlook for the consumer over the next year instead of just the holiday shopping season. The fiscal cliff and Sandy represent external shocks to a system that was on the mend as we headed into the fourth quarter. The question is whether those losses can be mitigated. A solution to the fiscal cliff and our larger deficit problems is within our reach; so is the ability to rebuild in the wake of a disaster, even one as large as Sandy, by transferring wealth from insurance and savings.
Read the full article on our Economic Minds blog.