Goldman Sachs’ weekly strategy research report focuses heavily on investors’ number one concern: the fiscal cliff.
The Goldman team believes that progress may be slow, and “any compromise on the ‘fiscal cliff’ will not be reached until late December.”
Uncertainty about the outcome of the election has now become uncertainty regarding the fiscal cliff.
The transition in focus to the fiscal cliff has been sudden and dramatic. Check out the chart below from Google trends, which shows that searches for ‘fiscal cliff’ have grown exponentially since the election:
The team breaks down the different features of the cliff and distinguishes between Goldman Sachs’ assumptions regarding the fiscal cliff compared to what will happen if Congress takes no action.
The key ideas: The payroll tax cut will expire, taxes on the rich will rise, and rather than a 3.5% GDP drag, the effect will only be 1.4%.
Photo: Goldman Sachs
Most notably, Goldman’s team assumes that the Bush tax rates will be maintained for low and middle income households in full but that the upper income tax cut will completely expire. This reflects White House press secretary Jay Carney’s recent statement that “The president would veto … any bill that extends the Bush Era tax cuts for the top two per cent of …earners in this country.”
Goldman’s report also included the following guidance:
…customers are postponing orders, tightly managing supply chains, introducing more spending scrutiny,extending deal cycles, instituting additional approval requirements, and are generally less willing to spend given uncertainty on the fiscal cliff and tax policy. Firms from all sectors, both large and small, reiterated the same points. Most managements do not expect the business environment in 2013 will be materially different from today.
In that case, the biggest economic risk from the fiscal cliff may not be going off it completely, but rather embracing growth-limiting austerity through too much compromise.
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