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That 'Fiscal Cliff' You're Worried About? It's Already Here

Monday, 9 Jul 2012 | 2:41 PM ET

The much-bandied about“Fiscal Cliff” is already here, according to economists and investors, as businesses curb spending in anticipation of the higher tax rates and reduced spending set to be enacted at the end of this year.

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“The fiscal cliff is not just a year-end story,” wrote Michelle Meyer and the economics team at Bank of America Merrill Lynch in a report to clients. “We expect the uncertainty shock to be realized in the coming months, escalating before the election.”

The economists argue in the report that businesses have already started to curb investment and hiring plans in the face of this tightening of fiscal policy, further cutting into GDP.

In fact, Bank of America believes that the first quarter economic growth of 1.9 percent will prove to be the best three-month period of the year. They see 1.5 percent annual growth in the second quarter and just a 1.3 percent GDP in the current quarter.

Fiscal cliff has become common nomenclature for the market bears, referring to the expiration at the end of 2012 of several tax cuts enacted under President George W. Bush, as well as mandatory spending cuts resulting from the debt ceiling fight last summer.

President Obama attempted to assuage some of this concern for Main Street and Wall Street Monday by saying he would like to extend the tax cuts for families making less than $250,000 a year. But the market wasn’t buying that a tiered plan would work or even pass Congress, as stocks stayed lower on commentary out of shops such as Bank of America.

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“This summer is going to be tricky,” said James Lebenthal of Lebenthal Asset Management, who is just 75 percent invested at this point with the rest in cash and a hedge against volatility. Along with Europe and China, Lebenthal cites the signs of slowing growth already rearing their head in the U.S., which won’t be helped by the “political rhetoric leading up to the election.”

June data was much worse than economists’ expected and many of them think the political uncertainty is what was missing from their models.

Last Friday’s jobs report was the glaring example of a negative surprise as the economy added just 80,000 jobs, 20,000 fewer than economists’ consensus. But June saw surprisingly weak readings of the service and manufacturing portions of the economy too, as well as consumer confidence.

“We think it is only a matter of time before corporations more broadly slow their spending plans,” stated the Bank of America Merrill Lynch Report.

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