Here come the pre-emptive GDP downgrades in the face of the fiscal cliff (via ZH):
2. We are making slight changes to the fiscal policy assumptions embedded in our forecast. President Obama has indicated he would veto legislation that extends the 2001/2003 tax cuts for income over $250k, while congressional Republicans have objected to decoupling them from the middle-income tax cuts. In light of the President’s reelection, we have opted to assume that the upper-income tax cuts will expire. These are worth $56bn in 2013, and their expiration is likely to increase the drag on growth from fiscal policy by around 0.2 percentage points in 2013, on a Q4/Q4 basis. While there is a clear possibility of a compromise at a higher income threshold like $1 million, this is roughly balanced by the possibility of fiscal restraint from other unexpected sources, or the possibility that Congress fails to address the fiscal cliff until early 2013.
3. Based on these slightly modified fiscal assumptions and other developments, we are changing our forecast slightly. We are taking down our Q4 GDP growth forecast from 1.9% to 1.5%, due to a change in the tracking assumptions for October after Hurricane Sandy. Our forecast for Q1 and Q2 2013 will remain at 1.5% and 2%, respectively. Although the additional fiscal restraint would weigh on growth, the rebound from Hurricane Sandy is likely to lift growth which should mostly offset the fiscal effect.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.