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Wednesday, June 20, 2012

Wells Fargo: The Fiscal Cliff: Likelihood and Economic Impact

As we approach the second half of 2012, fiscal policy uncertainty will continue to build around the rapidly approaching “fiscal cliff” of significant tax increases and large government spending cuts that are set to take place beginning in January 2013. In our 2012 Annual Outlook, we noted that one of the major risks to our forecast was ongoing political uncertainty that would put downward pressure on consumer spending and business investment, and thus headline GDP growth. As the economic data have begun to unfold in the middle of this year, we are beginning to see the first signs of growth softening in response to that uncertainty. We attribute the bulk of the weaker economic data to deteriorating economic conditions globally; however, recent academic work has provided evidence that increases in policy uncertainty can damage the economy. Thus, some have argued that the recent pullback in economic indicators may be attributed to increasing political uncertainty.

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