NEW YORK (Reuters) – American employers are keeping their fingers crossed that politicians will steer away from a “fiscal cliff” of major tax hikes and spending cuts in early 2013, and, so far at least, have not gone back to a defensive recession-mode.
Executives are prepared to reduce hiring or staffing if need be, but they say they are counting on the U.S. Congress to strike a last-minute deal.
“If they do go off the fiscal cliff, I’ll immediately see my (sales) pipeline turn, and that’s what we base our hiring decisions on,” said Stephen Gray, chief executive officer at Gray Construction, an engineering, design and construction firm in Kentucky with 437 employees.
“But I don’t see that bothering me until after it happens,” Gray said in an interview from Lexington. “That may be a problem on January 2nd.”
Less than six months away, the threat of big tax rises and spending cuts scheduled for January poses a new risk to the economy and struggling U.S. labor market.
In Washington and on Wall Street, warnings about a potentially huge hit to growth are growing louder as election campaigning effectively blocks any new legislation until after the November 6 poll.
The prospects for jobs growth in the rest of this year could hinge on how seriously employers take the threat of Congress failing to find a deal. Hiring was dismal for a fourth straight month in June, with non-farm payrolls expanding by just 80,000.
Last month, Federal Reserve Chairman Ben Bernanke said he expected uncertainty related to the fiscal cliff “will have some economic effects” later this year, and referenced the confusion it can cause for companies with government contracts in 2013.
For now, U.S. companies are focused on the more immediate threats from Europe’s unfolding debt crisis and China’s slowing economy. But 2013 looks particularly unclear.
Julie Brinkerhoff-Jacobs, president of landscape design company Lifescapes International, which has 46 employees, said she is scheduling a meeting with her accountant and attorney soon to hash out tax implications from the fiscal cliff.
“My attitude is I want to know whatever the possibilities might be,” she said from Newport Beach, California. “We just need to know whether we’ll have enough cash flow, and what we have to do to adjust.”
On Long Island, D’Addario & Co, which makes guitar strings and other music products and employs some 1,000 workers in the United States, is analyzing how possible government spending cuts would hit sales to school music programs, which account for about 15 percent of business.
The company is growing and has proven resilient to economic swings, but another recession would likely cause management to cut hiring or staffing, its president, Rick Drumm, said. “But we can only control what we can control,” he said. “We can’t control Washington – hell, Washington can’t control Washington.”
On January 1, 2013, Bush-era tax cuts are set to expire, $1.2 trillion in automatic spending cuts begin – the price of Congress’ failure to seal a long-term fiscal plan last year – and the U.S. debt ceiling will need to be raised again. Those and other scheduled measures will probably need to be dealt with in the lame duck session of Congress, after the election.
If lawmakers take no action, the economy would likely enter recession in the first half of next year, contracting at an annual rate of 1.3 percent, according to the nonpartisan Congressional Budget Office.
Inaction would incur too many job losses for Congress to let it happen, said Greg Hayes, chief financial officer at aerospace products manufacturer United Technologies Corp.
“Once the election is over and people can put politics aside, the leadership will emerge and they will do the right thing,” Hayes said at a conference last month. “Unfortunately, there is going to be a lot of uncertainty between now and then.”
After the fight in Congress over the U.S. debt ceiling last summer – which cost the United States its pristine AAA debt rating – not everyone is convinced.
“I personally have no confidence in our politicians to get it right,” Hamid Moghadam, co-CEO at real estate firm Prologis Inc, said on a May conference call.
Whatever the political outcome, some believe employers will show increased nervousness as the year advances.
“Our view is that they will slow the pace of hiring and investment in the second half of this year, causing growth to slow down,” Bank of America economists wrote in a June research note. They expect U.S. gross domestic product growth to slow to 1 percent by the fourth quarter due to a “major spike in uncertainty.”
Questions over taxes and spending have caused some small firms to take steps to protect their interests, said Richard Curtin, an economist at the University of Michigan who oversees a quarterly survey conducted by small businesses group Vistage International. “This is a concern especially if you don’t think the same party is going to win both houses and the presidency,” he added.
“What I see among industry contacts is a lot of neutrality,” said Russ Williams, CEO of Archer>Malmo, an advertising and public relations firm in Memphis, Tennessee.
“I don’t see anybody real optimistic or doing a whole lot of hiring,” he said. “But I also don’t see anybody real pessimistic or cutting back drastically like we saw in the prior 36 months.”
(Editing by Tim Dobbyn)