In an analyst note, Bofa/ML’s Ethan S. Harris drops a bit of a bombshell prediction:We expect a moderate slowdown in the beginning of next year, as two small policy shocks—another debt downgrade and fiscal tightening—hit the economy. The “not-so-super” Deficit Commission is very unlikely to come up with a credible deficit-reduction plan. The committee is more divided than the overall Congress. Since the fall-back plan is sharp cuts in discretionary spending, the whole point of the Committee is to put taxes and entitlements on the table. However, all the Republican members have signed the Norquist “no taxes” pledge and with taxes off the table it is hard to imagine the liberal Democrats on the Committee agreeing to significant entitlement cuts. The credit rating agencies have strongly suggested that further rating cuts are likely if Congress does not come up with a credible long-run plan. Hence, we expect at least one credit downgrade in late November or early December when the super Committee crashes.
This is quite a stunning prediction, mainly because nobody is talking about this. And though the experts were 100% wrong in thinking that a downgrade would increase borrowing costs, it did cause a major market jolt when it happened, leading to a major blow to confidence in August and September.
Another round of that would certainly not be helpful.
Hense Harris’ note is titled “Enjoy It While It Lasts.” We have a nice little upswing in economic data, but next year could be rough again, when these confidence shocks hit.
As for the immediate term, Harris sees 2.7% GDP for Q3 (the advance estimate for which will be released this coming Thursday) and 2.3% GDP for Q4.
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