A Recession Is Likely In 2013

Obama said some interesting things at his press conference Monday.

Central to his words was the theme that when the USA get its hands on the debt ceiling crisis and establishes a framework for a return to fiscal reality there will be a resumption of confidence. With that renewed confidence would come more consumer spending, more business spending and investment, investors (both in and out of the country) would be looking for new opportunities to put money to work.

The confidence that would come from a resolution of the budget dilemma would, by itself, be the tonic the economy needs to get moving forward again.

I think that is all rubbish. I will try to make the case that exactly the opposite will happen. There may very well be a relief rally for a bit after news of a deal. But I say that relief will turn to fear in a matter of months. Start with the President’s words that I thought were important:

He made it clear on several occasions; The time is now.

We have to eat our peas.

But no sooner did he make clear his commitment to tackling the problems he said this:

I want to be crystal clear. Nobody has talked about increasing taxes now. Nobody has talked about increasing taxes next year. We’re talking 2013 and the out years.

This reconfirms old news. Anything that will come as part of the Plan will not be effective until 2013. No cuts, no tax increases.

This next part confirms what I (and others) have been saying. As part of the deal to raise taxes and cut spending in future years there will be a short-term stimulus program. The President made clear what will be a part of the package:

(cuts in FICA payroll taxes) would be a component of this overall package.

Now take a big leap and assume that this happens. What will we have?

*In 2012 there would be an expansion of the (one time only) reduction in payroll taxes. Employees would get an additional 2% reduction (total 4%) and employers would get a 3% cut. This reduction would be tied (in part) to job creation.

*In 2012 there would be no other changes of substance to the current 2012 budget. The total additional stimulus would be $350 billion (all through FICA reductions). The new stimulus would provide a boost to GDP of about 1.5%.


Starting in January 2013 the roof will cave in. The short-term stimulus will have ended. The cuts and new taxes will be kicking in.

*Workers will get hammered. They will face a 4% increase in payroll taxes (versus the December check). That comes to $2,000 per year for the average family. That’s a very big number and it hurts the bottom end of wage earners the hardest. The YoY change will result in an increase in worker’s FICA taxes by $240 billion!

*Business FICA taxes will also go up $120 billion. With that increase (reversal of the “one time” holiday) will go any incentives for hiring new workers.

That’s just a reversal of the short-term stimulus that returns us to “normal”. Then there would be those new tax increases/spending cuts.

*The Bush tax cuts on +250k will be gone. That will be another $50b that gets transferred to the Feds.

*The AMT is going to have to be re-indexed. This hideous tax will hit millions of taxpayers in 2013. It will cause homeowners with children to scratch their heads in dismay. Family incomes above $105k will all pay higher taxes as a result. Call that another $50b.

*Corporate taxes are going up. This will not add up to much. Maybe $20b guts sucked away from the fat cats.

*Speaking of fat cats, the Hedge Fund crowd will lose their special tax position. Their income will be treated as “Ordinary” versus “Capital”. That’s another $10b or so out of circulation.

*Taxes on dividends and capital gains are headed higher as well. This will be phased in over time in an effort to appease the big Wall Street donors. It could add up to $20b in 2013.

*Deductions of all sorts are going to be getting phased out. This will not be a big $ item in 2013, but anyone looking at the future will realise that most “prized” deductions will be lost in less than five years. This too will change the mood for investing in something like a house. It might even change one’s plans for having a child. There won’t be any deductions for the $400,000 it costs to raise a kid these days.

*The rate of automatic increases (COLA adjustments) for Social Security will be altered. Those on SS will not see a lower check in Jan. 2013. But they can expect to see that the checks will not grow anywhere near as fast as inflation for the next 20 years or so.

That will scare the crap out of a bunch of them. How will they respond? Trying to cut back on some more spending is the only way. It’s impossible to measure this reaction, but it surely will be felt to some extent. This too will be a drag on GDP.

*The rate of increases in Medicare/Medicaid disbursements will be altered. Instead of running full speed into financial oblivion these programs will lower the trajectory of expenditures to a walk. Whatever expectations you now have regarding the growth of the health care industry, you have to take them down a notch or two post 2013. That’s a massive change in thinking. Every hospital, doctor and treatment/diagnostic facility will be gearing down future plans.

I could go on for a fair bit. I hope you get the picture. The Plan that Obama outlined is going to result in a massive YoY adjustment in 2013. The reversal of the FICA (one time) tax holiday is $350b. Other tax increases could easily add up to another $100b. This is equivalent to a 3% immediate hit to GDP. I can’t think of a bigger historical YoY shift in taxes.

As I suggest, there are many other factors that will come into play. Consumption patterns and investment decisions will be altered. It all adds up to a very murky economic picture starting in 2013.

Obama is right when he says that confidence is a critical component of economic expansion. My question is:

“How are people going to be feeling a few months from now when the euphoria passes and the reality sets it?”

The press will have a field day with the story. Every blue chip economist and Wall Street pundit will be pointing to the same charts and concluding:

A recession is likely in 2013

Fear of the future is a powerful force. People will have a year to worry about the changes that are coming. They will worry over how those changes will affect their pocket books. I can’t think of a more depressing scenario.

There might be a month or two of renewed confidence following a budget deal. By wintertime it will fade. It will be replaced with the exact opposite. How could it not?

This post was published at the author’s blog.

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