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In a quarterly note, Morgan Stanley’s chief economist Vincent Reinhart discusses the prospects for sustainable growth above 2%. Could we break out on the high side of the 2% growth channel? Sure. The story runs that an inventory build and good weather led to extra hiring. Hiring led to income. Income led to sales. Sales led to sales expectations and raised the prospects for further inventory building and capital spending. All this gets validated in an equity rally that allows balance sheet repair the easy way, through capital gains, rather than the hard way, through saving.
Every time my optimism picks up, politics shoots it down. Although we all know there is an election this fall, investors are only beginning to focus on the fiscal cliff that awaits on December 31. On that date, the Bush tax cuts sunset, the payroll tax reduction and extended unemployment benefits lapse, AMT relief goes away, the fix related to Medicare payments to doctors may not be renewed, and the sequestration associated with the Budget Control Act kicks in. All told, that’s more than 4% of fiscal contraction. Around the same time, Congress will have to raise the debt ceiling.