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Economy, Stocks Could Take Big Hit in Payroll-Tax Fight

If a bickering Congress can't agree to extend the payroll tax cut and unemployment insurance, US economic growth could slow by almost a full percentage point next year and send stocks down sharply, analysts say.

“If the payroll tax cuts revert to their 2010 levels and unemployment benefits are not extended, we think that US GDP growthin 2012 could be depressed by roughly 0.8 percentage point, implying growth of just 1.5 percent versus our current forecast of 2.3 percent,” wrote Lewis Alexander, a Nomura economist.

The House rejected a two-month extension on Tuesday as Republicans demanded the Senate negotatie a full-year extension as well as how the break is funded. The Senate, which already passed the extension on Saturday with plenty of Republican support, has adjourned for the Christmas break with no plans to return.

If both sides can’t come together soon, the payroll-tax rate goes back to 6.2 percent from 4.2 percent at the start of 2012.

The bigger worry is that lawmakers will fail to come together in January and approve the payroll cuts, unemployment insurance and Medicare payment rates for doctors for the full year.

“If they really screw this up, we could retest those October lows below 1100 for the S&P 500 index, said Michael Block, chief equities strategist at Phoenix Partners Group.

The standoff is the latest in a string of partisan fights (i.e. debt ceiling) this year that have weighed on investor confidence and sent approval ratings for Congress to a record low.

“When you think of the dramatic economic destruction the administration and Congress has done so far, 0.8 percent of GDP seems like a bargain,” said Jim Iurio, a managing director at TJM Institutional Services.

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