Nelson Schwartz reports that the prospects of Congress allowing the country to fall over the fiscal cliff, that combination of tax hikes and spending cuts set to trigger at the end of the year, has already led to businesses pulling back on hiring:
A rising number of manufacturers are canceling new investments and putting off new hires because they fear paralysis in Washington will force hundreds of billions in tax increases and budget cuts in January, undermining economic growth in the coming months.
Executives at companies making everything from electrical components and power systems to automotive parts say the fiscal stalemate is prompting them to pull back now, rather than wait for a possible resolution to the deadlock on Capitol Hill [...]
Hubbell, a maker of electrical products, has canceled several million dollars’ worth of equipment orders and delayed long-planned factory upgrades in the last few months, said Timothy H. Powers, the company’s chief executive. It has also held off hiring workers for about 100 positions that would otherwise have been filled, he said.
“The fiscal cliff is the primary driver of uncertainty, and a person in my position is going to make a decision to postpone hiring and investments,” Mr. Powers said. “We can see it in our order patterns, and customers are delaying. We don’t have to get to the edge of the cliff before the damage is done.”
I don’t know that I believe that customers with money in hand are really stopping their spending because they don’t know what they’ll have to pay in withholding five months from now, and to the IRS a year later. But businesses definitely operate with more long-term planning than your average consumer, and the stories here of slowing hiring appear credible. The resultant weak job market probably drives the delay in sales.
This comes at a time when there actually should be more optimism about avoiding the fiscal cliff. The Republican leader, presumptive nominee Mitt Romney, just called for a one-year delay on the trigger cuts, putting the GOP firmly on the side of avoiding the fiscal cliff entirely simply by kicking the can down the road. Meanwhile, leading Democrats like House Minority Leader Nancy Pelosi have proposed a Bush tax cuts-for-trigger swap, where the expiration of the tax cuts above $250,000 pay to offset the spending reductions (and that almost pencils out, missing by about $250 billion over a ten-year period). But this is all happening at an inside baseball level and not in such a way as to calm the nerves of the business community.
Could it be that business types are simply reacting to the slowdown in economic growth, as well as the sure bet that Congress will pull back some fiscal accommodation at the end of the year? The payroll tax cut is a goner, taking away $110 billion in government spending in 2013 (as much as the trigger). What’s more, the proposed six-month continuing resolution for the budget eliminates any new programs and holds in place whatever wasteful programs carry over from the previous year. And, the spending cap itself represents a slowdown in fiscal policy, at a time when the economy can ill afford it. While the fiscal cliff is part of this milieu, the general malaise can be attributed to a variety of factors.
This should not discount the impact of the fiscal cliff, where roughly $600 billion in fiscal policies are at stake. But the fiscal reductions are in some manner baked into the cake.