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'Fiscal cliff' looms, but longer-term outlook is sunnier

  • Article by: PAUL WISEMAN and CHRISTOPHER
  • S. RUGABER
  • November 7, 2012 - 8:18 PM

Some reward.

Here's the assignment President Obama has won with his re-election: Improve an economy burdened by high unemployment, stagnant pay, a European financial crisis, slowing global growth and U.S. companies still too anxious to expand much.

And, oh yes, an economy that risks sinking into another recession if Congress can't reach a budget deal to avert tax increases and deep spending cuts starting in January.

Yet the outlook isn't all grim. Signs suggest that the next four years will coincide with a vastly healthier economy than the previous four, which overlapped the Great Recession.

Obama has said he would help create jobs by preserving low income-tax rates for all except high-income Americans, spending more on public works and giving targeted tax breaks to businesses.

He used his victory speech in Chicago to stress that the economy is recovering and promised action in the coming months to reduce the government's budget deficit, overhaul the tax system and reform immigration laws.

"We can build on the progress we've made and continue to fight for new jobs and new opportunity and new security for the middle class," Obama said.

The jobs picture has already been improving gradually. Employers added a solid 171,000 jobs in October. Hiring was also stronger in August and September than first thought.

That said, most economists predict the improvement will remain steady but slow. The unemployment rate is 7.9 percent. Obama was re-elected Tuesday night with the highest unemployment rate for any incumbent president since Franklin Roosevelt. And the Federal Reserve expects unemployment to be 7.6 percent or higher throughout 2013.

Economists surveyed last month by the Associated Press said they expected the economy to grow 2.3 percent next year, too slight to generate strong job growth.

Part of the reason is that much of Europe has sunk into recession. Europe buys 22 percent of America's exports, and U.S. companies have invested heavily there. Any slowdown in Europe dents U.S. exports and corporate profits.

Most urgently, the U.S. economy will fall over a "fiscal cliff" without a budget deal by year's end. Spending cuts and tax increases that would total about $800 billion in 2013 will start to kick in. The combination of those measures would likely trigger a recession and drive unemployment up to 9 percent next year, according to estimates by the Congressional Budget Office.

Many U.S. employers are wary of expanding or hiring until that potential crisis is averted. That's why analysts have said resolving, or at least delaying, the fiscal cliff should be the most urgent economic priority for the White House.

In the longer run, analysts are more optimistic. Americans are feeling generally better about the economy. Measures of consumer confidence are at or near five-year highs.

A brighter outlook is due, in part, to a steady increase in home prices. Higher home prices can help create a "wealth effect," making homeowners feel richer and spurring more spending. Americans have also been shrinking debts and saving slightly more.

Economists note that recoveries after financial crises tend to be painfully slow. In part, that's because time is needed for consumers to reduce debts and for banks to recover and lend again.

Paul Ashworth, an economist at Capital Economics, predicted that "Obama "is going to have an easier time of it ... because we're further along the road to recovery after the financial crisis."

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