The Daily Dish

Good Morning -- 

Popping this morning: Weekly jobless claims up 78,000 to 439,000; Consumer Price Index for All Urban Consumers increased 0.1 percent. 

The fiscal cliff has dominated the headlines for the past week, but here at AAF we've been studying it for months -- ever since Fed Chairman Bernanke coined the phrase and the CBO said it would guarantee recession. As DHE pointed out in May, the CBO guaranteeing a recession is "a big deal." They're out with another warning "that offers a gloomy outlook for U.S. growth prospects." Reuters notes that "the CBO projects real GDP growth at between 2.1 percent and 2.4 percent in 2022, depending on fiscal choices made by Congress. U.S. GDP expanded at a 2.0 percent annual rate in the third quarter." It comes as no surprise that "as Congress and the White House dive into high-stakes negotiations over [the fiscal cliff], the future U.S. growth rate is critical to their decisions." 

Doug's Daily Economic Outlook

Reuters today highlights the danger to the U.S. credit rating of failing to reach a deal to put the debt on a sustainable trajectory in 2013.  There are two real dangers in this regard.  The first is the absence of a plan. Despite the president's repeated calls for a "balanced plan" he has yet to do anything other than call for 41.6 trillion in higher taxes on the rich.  What, exactly, are the entitlement reforms that the White House will provide the leadership to pursue and draw its recalcitrant Senate allies into a real debate? 

The second is the fiscal cliff itself.  Going over the fiscal cliff would produce a real shock -- higher taxes and lower spending -- but more importantly a financial shock.  Consider yesterday's sharp selloff in the aftermath of the president's remarks (and, granted, the Israeli strikes on Hamas).  The U.S. financial system remains in recovery from 2008 and a setback will not be easily reversed.  The upshot is that going over the cliff will produce a recession that cannot be quickly or easily reversed.  That's bad enough.  But it is also unimaginable that the U.S. will substantially address the current and future debt in the midst of a recession.  

A country in recession with high debt sounds like most of Europe (only France and Germany have positive, if anemic, growth rates). 

The threat of downgrade is real.  The need to traverse the twin terrors of the fiscal cliff and grand bargain is real. Even though the U.S. has the same problems, and the same cast of characters as before the election, it needs a different ending to the movie.

What We're Reading

Obama says tax hike has to come first in "fiscal cliff" deal -- President Barack Obama said on Wednesday that Republicans would have to agree to raise taxes on the wealthy as the first step in a budget deal that would prevent a dysfunctional Washington from pushing the economy into recession. In his first news conference since winning re-election last week, Obama said he would be open to considering Republican priorities like entailment reform and other ways to raise tax revenue as part of a broad-based deal to se the nation's finances on a sustainable course. (Reuters)

Executives urge White House, lawmakers to avoid "fiscal cliff" -- Business executive urged President Barack Obama and U.S lawmakers on Wednesday to prevent a year-end across-the-board tax rise that will go into effect unless Congress acts, saying it would hurt consumer spending and business. Obama met with 12 business executives at the White House to discuss the so-called fiscal cliff. (Reuters)

Health Law Has States Feeling Tense Over Deadline -- The days since President Obama won re-election have been marked by tension and angst in Republican-led states like Iowa, where Gov. Terry Brandstad has waited until the last minute to decide whether to create a crucial tool for people to get medical coverage under Mr Obama's health care law…States are supposed to tell the Obama administration by Friday whether they want to create their own health insurance exchange -- a deadline that many had bet might never come to pass, choosing to sit on their hands for months in the hope that Mitt Romney would in the presidency and the health care law would be repealed. (NYT)

FHA Nears Need for Taxpayer Funds -- The Federal Housing Administration is expected to report this week it could exhaust its reserves because of rising mortgage delinquencies, according to people familiar with the agency's finances, a development that could result in the agency needing to draw on taxpayer funding for the first time in its 78-year history. (WSJ)

Fed Moves Toward Tying Interest-Rate Decisions to Economic Data -- The Federal Reserve is embarking on the next step in Chairman Ben S. Bernanke's journey toward greater transparency -- tying its outlook for borrowing costs to measures of employment and inflation. Policy makers "general favored the use of economic variables" to provide guidance on the when they are likely to approve their first interest-rate increase since 2008, according to minutes of their Oct. 23-24 meeting released yesterday. Such measures might replace or supplement a calendar date, currently set at mid-2015. (Bloomberg) 

Report: Employers plan modest increase in hiring for new college grads in coming year -- Modest good news for college students: An annual survey predicts employers will increase hiring of new 4-year college graduates about 5 percent in the coming year. Demand for graduates with associate's degrees is expected to increase more sharply -- by about 30 percent compared to last year's survey -- while MBA hiring appears headed for an unexpected decline. (WaPo) 

Retail Sales Sag as Sandy Slows Automobile Purchases -- U.S. retail sales fell in October for the first time in three months as super storm Sandy slammed the brakes on automobile purchases, suggesting a loss of momentum in spending early in the fourth quarter. Other data on Wednesday showed little inflation, with wholesale prices falling in October for the first time since May, giving the U.S. Federal Reserve latitude to maintain its ultra easy monetary policy stance to nurse the economy back to health. (CNBC)

Also from the Forum

Iran Sanctions: Overview -- U.S. sanctions against Iran have accused and evolved over time. During the 1980s and 1990s, U.S. sanctions were intended to address Iran's support for terrorism. Today's sanctions seek to persuade Iran to abandon its nuclear program, and to a lesser degree support human rights and political change. (Overview here) 

Boom, Bust, and Beyond: A Look at Housing Market Data in Florida -- The housing crisis resulted in a nearly unprecedented loss of household wealth that, while widespread, hit a handful of states particularly hard. Congress now turns to address a grim fiscal outlook and a housing finance system burdened with uncertainty. In Florida, prices statewide fell 52.7 percent from the peak of the market in April 2006 to the trough in October 2011, according to Zillow. As a large, diverse state with over 19 million people, the pace of the recovery has varied among its metropolitan areas. Yet Florida's narrative is defined by high foreclosure rates, lengthy foreclosure timelines, and steep jobs losses in the construction industry. For sustained improvement across the state, Florida must quickly clear the inventory of distressed properties, i.e. foreclosed homes, and pursue stronger job and wage growth. (Paper here)