Storm and ‘cliff’ muddy economic picture Anxi

Storm and ‘cliff’ muddy economic picture
Anxious investors look to Washington to resolve budget standoff
WASHINGTON (MarketWatch) — The U.S. economy entered the fourth quarter on solid footing, but the aftershocks of hurricane Sandy and the looming “fiscal cliff” could make for some shakier moments soon. http://www.marketwatch.com/story/storm-and-cl...atest_news

The hurricane tore a devastating path through New York and New Jersey and also hurt other states, disrupting the routines of consumers, retailers and manufacturers alike. The effects of the storm are already making it harder to get a read on how the economy is performing, though it’s only a temporary condition.

More long-lasting worries among businesses and investors center on the fiscal cliff — the onset of big tax increases and deep federal spending cuts on Jan. 1. These changes will take effect unless a divided Washington strikes a deal to put them off.

Fear of a fiscal cliff — some economists warn it could cause another recession — was palpable in U.S. markets last week.

The Dow Jones industrial average, for example, fell several hundred points and closed below 13,000 for the first time in more than two months.

“The primary topic on everyone’s mind was the year-end fiscal cliff,” said Neil Dutta, head of economics at Renaissance Macro, after meetings with investors.

Muddied outlook

For the upcoming week, most of the economic data is likely to be distorted by hurricane Sandy.

Take the October retail-sales report on Wednesday. Normally retail sales is a big number for Wall Street since consumer spending accounts for as much as 70% of the U.S. economy.

Yet economists surveyed by MarketWatch expect retail sales to fall 0.1% in October, a sharp reversal from September’s 1.1% gain, because of Sandy. The storm closed many stores in the Northeast and sales of items such as autos took a hit.

What’s more, gas prices leveled off in October and won’t contribute as much to retail sales. Higher gas prices had been a big contributor to the increase in consumer spending in September and August.

For consumers, of course, lower gas prices are a good thing. They get to spend more money on other goods and services they’d like to purchase. The big question is whether they bank some of that extra money instead to rebuild their savings. The savings rate has fallen sharply in the past few months.

The hurricane is also expected to muddy up weekly jobless claims data and two closely followed surveys of manufacturing conditions in the New York state and Philadelphia regions. All three reports come out Thursday.

Both manufacturing surveys — the Empire State index and the Philadelphia Fed gauge — are expected to be weaker.

“There will be a lot of volatility in the data through the end of year,” said Yelena Shulyatyeva, an economist at BNP Paribas. “Sandy has caused a lot of disruption.”

Other key reports on inflation, the producer and consumer price indexes, are likely to show that price pressures remain muted.

Cliff-hanger in Washington

The sketchy quality of the economic data means investors will pay much closer to talk in Washington about the fiscal cliff. Leaders of both parties offered soothing words last week about the desire to reach a compromise satisfiable to all, but neither side offered any concessions.

Democrats want higher taxes on the wealthy to be included in any deal. Republicans say tax increases are off the table and they are pushing for sharper cuts in federal spending. Read: Standoff over taxes as cliff nears.

Unless Democrats and Republicans agree, a combination of higher taxes and spending cuts totaling as much as $600 billion or more would kick in at the start of 2013. That would hurt consumers and investors and some industries such as defense could suffer a serious blow.

While many on Wall Street expect Washington to avert a crisis, they are less sure if it will happen soon. Some believe the two parties will craft a temporary fix and put off a long-term solution until the second half of 2013.

Yet investors aren’t entirely convinced, as the pullback in stocks last week showed. Dutta says investors are skeptical that the same political leaders who failed to reach a “grand bargain” on the nation’s fiscal future in 2011 will be able to bridge the divide after an election that basically affirmed the status quo.

If that skepticism proves well founded, expect the economy to get worse before it gets better.

Investors are skeptical that the same party leaders who put in place the expiration of Bush-era tax cuts and across-the-bard spending can find a way to avert crisis since they were unable to do so a year earlier.

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Democrats and Republicans will have to agree to a compromise to change the law in order to avert a scenario that could depress the economy.