Fiscal Cliff Causes Business Uncertainty to Grow

Dec 3, 2012

If you watch the Economic Policy Uncertainty Index, you see it’s been rising over the last few months. Based on what businesses have told regional Federal Reserve banks in the East and Midwest, the uncertain outcome of negotiations to avoid going over the fiscal cliff, tax increases and large spending cuts set to hit the economy in January, may be partly responsible [emphasis mine].

Boston District:

Because of the so-called fiscal cliff, there is some uncertainty about what to expect in terms of tax policy; this is viewed as particularly affecting planning by small businesses.

Looking forward, New England software and IT contacts are generally less upbeat than they were three and six months ago, with many expressing growing concerns regarding the "fiscal cliff" and macroeconomic conditions in Europe. Most expect only modest growth through Q1 2013.

In Boston, office fundamentals showed modest improvements in the third quarter, but leasing inquiries have reportedly fallen off recently amid concern over the fiscal cliff.

Philadelphia District:

Recovery from Hurricane Sandy and a renewed focus on the looming fiscal cliff contribute to greater uncertainty than before.

Cleveland District:

Some freight haulers said that 2012 expenditures are on track. Others reported a postponement in purchasing replacement equipment due to a sluggish economy and uncertainty about the outcome of the fiscal cliff.

Chicago District:

Demand for nonresidential construction continued to increase at a slow pace, with contacts noting that many of their customers are waiting for the resolution of the fiscal cliff and stabilization in Europe before moving ahead on capital spending projects.

[Manufacturers] expected activity to remain subdued in the coming year, and voiced concerns about the potential impact of the fiscal cliff and weaker global demand for their products.

Instead of feeling uncertain, small businesses are just plain pessimistic, according to Gallup [via Mollie Hemingway at Ricochet]. While Gallup didn’t note how much the impending fiscal cliff has to do with this lack of confidence, the most-recent Small Business Outlook Survey, released in October by the U.S. Chamber, can tie this together. Ninety-three percent said that they were concerned about the fiscal cliff, and 62% believed it would have a negative effect on their business.

This evidence suggests that policy uncertainty is causing businesses to hold back hiring and investments. This should persuade Congress and the White House to come to an agreement.

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