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'Fiscal cliff' will dampen economic growth, Chapman forecast says

November 28, 2012|By Ricardo Lopez

The threat of the looming “fiscal cliff” is expected to temper economic growth in the U.S., according to a report released by Chapman University economists Wednesday.

In its quarterly forecast, Chapman economists set out a moderate view of the full impact of the fiscal cliff — the year-end tax increases and spending cuts that are set to take place if Congress doesn’t act.

In their scenario, the forecast predicted planned payroll tax hikes will proceed as planned, capital gains and estate taxes will rise, but cutbacks in government spending won’t be as drastic.

Even so, “we still see reduced government spending and higher taxes cutting spending by at least $200 billion,” the report said. “Such a reduction in the deficit will surely have long-term benefits. But the effects will be negative in the short run.”

Quiz: How much do you know about the 'fiscal cliff'?

The short-term effects will mean meager growth for the country’s gross domestic product. The forecast predicts real GDP growth in 2013 to amount to 2.1% -- about the same as 2012.

The U.S. economy continues to be vulnerable to the sluggish global economy as the Eurozone plods through its debt crisis and China’s economy slows. Net exports values, the difference between exports and imports, are expected to drop to -$433.9 billion in 2013, a drop of about $18 billion from 2012 levels.

“This drop in net exports surely isn’t the stuff of an economic meltdown, but it’s yet another negative that needs to be added to the … hit from contractionary fiscal policy,” the report cautioned.

There were a few bright spots in the forecast.

Consumer spending is expected to increase by $170 billion in 2013, the result of an improving labor market and a burgeoning housing recovery.

Consumer sentiment, according to a Chapman index, is at its highest level since the third quarter of 2007.

“Despite higher taxes hitting households’ pocketbooks, our forecast calls for an increase in consumer spending of 1.8%,” economists wrote.

On the labor market front, the Chapman forecast predicts statewide employment will increase by 1.6% in 2013 -- a gain of about 234,000 jobs.


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