Wednesday, August 22, 2012

Fiscal cliff scenarios - the Credit Suisse version

Back in May we discussed the impact of several possible "fiscal cliff" scenarios on the US GDP growth (the GDP drag). Those projections were developed by Goldman. We now have a similar analysis performed by Credit Suisse. CS broke down the various possibilities into four likelihood "baskets":
Basket 1 – The CBO’s “other spending and revenue changes” and the Obamacare tax increases. In our judgment, both highly seem likely to phase in. This would impart the smallest amount of fiscal drag.



Basket 2 – The payroll tax cut, which is losing support and doesn’t appear likely to be extended, but there is still some chance it will. Basket 1+2 is our “most likely” scenario.

Basket 3 – This includes the upper income tax hikes, budget sequester, and expiration of emergency unemployment insurance benefits and the “other expiring provisions” (including the bonus depreciation allowance). These are “on the table” but not part of our baseline.

Basket 4 - The expiration of tax rates below the $200K/$250K threshold, failure to patch the AMT, and failure to enact the “Doc Fix.” In our view, all are highly unlikely.
Then each scenario would represent a combination of these baskets as a cumulative effect.
  • Best Case = Basket 1
  • Most Likely = Basket 1 + Basket 2
  • Plausible Downside = Basket 1 + Basket 2 + Basket 3
  • Worst Case = Basket 1 + Basket 2 + Basket 3 + Basket 4
And here is the impact of these scenarios on nominal US GDP.

Source: Credit Suisse


Clearly there is a significant chance that, if not addressed, the "fiscal cliff" will tip the US economy into a recession. This was discussed months ago by numerous economists. But today the Congressional Budget Office made the news by stating the obvious - with timing that certainly feels politically motivated.
Politico: - A trip over the fiscal cliff would likely send the U.S. economy into a recession in 2013, the Congressional Budget Office said on Wednesday, underscoring the impact that congressional gridlock will have if a deal to prevent scheduled tax hikes and spending cuts cannot be struck by the end of the year.

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