(Bloomberg News) Companies are starting to delay hiring and spending out of concern that Congress won't reach a compromise in time to avoid automatic tax increases and budget cuts that would pull billions of dollars of purchasing power out of the economy.
Faced with a so-called fiscal cliff of more than $600 billion in higher taxes and reductions in defense and other government programs in 2013, U.S. companies are pulling back, though the deadline for congressional action is more than six months away.
The best strategy for companies to follow when confronted with such uncertainty ahead of Dec. 31 is to "stay lean and keep your inventories taut," Sandy Cutler, chief executive officer of industrial equipment-maker Eaton Corp. in Cleveland, told a conference May 31.
Economists are predicting this trend will pick up through the year. "A lot of people see the fiscal cliff as a 2013 story, but you don't board up the windows when the hurricane is there, you board up the windows in anticipation," said Michael Hanson, senior U.S. economist at Bank of America Corp. in New York.
Hanson sees U.S. growth decelerating to 1.3 percent in the third quarter and 1 percent in the fourth quarter as the European debt crisis and worries over the U.S. budget increasingly weigh on the economy. Gross domestic product advanced at a 1.9 percent annual pace in the first quarter.
Recession Concern
Things would get worse next year if Congress allows all of the scheduled spending reductions and tax increases to take effect. In that case, a recession is likely, the non-partisan Congressional Budget Office warned in a report last month.
The scheduled budget cuts haven't had much of an effect on financial markets, with investors preoccupied by the intensifying crisis in Europe. Sixty-one percent of the 234 fund managers surveyed by Bank of America last month saw the euro region's debt troubles as the biggest concern in the world economy, more than three times as many who said that about the U.S. fiscal cliff.
In a sign of investors' equanimity, U.S. stocks have been the best-performing major equity market in 2012, with the Standard & Poor's 500 Index up by more than 6 percent so far this year.
Such sentiment could shift if Congress doesn't act in the next few months to avoid the year-end budget precipice, said Peter Fisher, senior managing director in New York at BlackRock Inc., the world's largest money manager.