America Faces a Substantial Risk of Recession due to Fiscal Cliff – ValueWalk Premium
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America Faces a Substantial Risk of Recession due to Fiscal Cliff

In today's “Bloomberg Economics BRIEF,” Bloomberg senior economist Joe Brusuelas writes that with the U.S. economy growing only 1.5 percent in the fourth quarter, America remains in a “slow growth trap” and faces a “substantial risk” of recession due to the looming fiscal cliff.

America Faces a Substantial Risk of Recession due to Fiscal Cliff

The Bloomberg Q4 2012 economic outlook concludes:


  • ·         U.S. economy in a slow growth trap:  Bloomberg data finds the economy grew at a 1.65 percent pace in the first half of the year and is now tracking at 1.5 percent pace of growth. “Soft household spending and a broad based slowdown in investment spending figure to be the primary drivers of sluggish growth,” writes Brusuelas.


  • ·         Long road to full employment:  According to Bloomberg BRIEF, “the underlying details show the structural aspects of unemployment remain unchanged,” despite the recent decline in the unemployment rate.  Brusuelas finds “there is little in the data to suggest” a pick-up in hiring, predicting job growth at around 100,000 per month and a “slight risk” of unemployment rate rising to 8 percent by end of year.


  • ·         Substantial risk of recession due to the approaching fiscal cliff.  “The probability of the fiscal shock taking place next year has grown. While the Fed is on record saying it can act to help mitigate the impact of fiscal policy, it cannot completely forestall the full effect” of the shock set to kick in Jan 2013 should the current fiscal policy path be left unchanged.


  • ·         Fed likely to resume buying Treasuries at next meeting.  “Due to the wide array of possible outcomes in the upcoming national election, and continued fiscal gridlock and political polarization, the Fed will probably move to resume its purchase program of U.S. treasuries at its Dec. 12 meeting.”


  • ·         Euro zone recession supports modest appreciation of the U.S. dollar. The 10-year Treasury yield will be likely range-bound between 1.5 and 2 percent, with the USD likely to $1.28 versus the euro at year end.


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