One Man’s Opinion: Are Worries About The Fiscal Cliff Over-hyped?

 

The US economy grew by 2.3 percent in the second quarter, while the third quarter growth rate has been about three percent, which means average annual growth will be about 2.6 percent in 2012, says James Paulsen, chief investment strategist at Wells Capital Management.

There are so many more parts which are working than they were a year ago. For example, housing has improved significantly over the past 12 months, home prices are on a growth trajectory, bank lending was not existent a year ago but now rising, consumer confidence has hit a five year high, the unemployment rate is coming down, labor force is rising, the debt burdens are at record lows almost. So, a number of things are in place that allows the growth rate to move a little faster, James observed.

Secondly, the economy is still stimulating. There will be some fiscal tightening, but money supply has been growing rapidly, mortgage rates are at record lows, gas prices have been falling and inflation rate has been on the decline – from four percent a year ago to about two today. These are stimulating events that should help the economy in the next year, he noted.

Thirdly, and most importantly, China’s economy is showing signs of bottoming out. The Chinese economy is likely to reaccelerate in 2013 and if the emerging markets start recovering, manufacturing in the US, Germany and elsewhere will also pick up, James added.

Lastly, Hurricane Sandy will be a negative in the fourth quarter, but a positive in the first quarter of 2013 when rebuilding starts. The fiscal cliff will be a mild negative but will turn out less negative than people fear. So the economy can be expected to grow at about three percent next year.

Asked to comment on uncertainties surrounding the tax policies as companies have stopped hiring, James said some uncertainty will persist going forward. There will be some tax hikes and spending cuts, but most of it will be extended off in future to live for another day.

The uncertainties have been there for some time, but despite that, the unemployment rate has come down by the largest amount in the entire recovery in last year. The economy has not collapsed because of the looming fiscal cliff and people are giving it too much negative wave, he concluded. You can watch the video here.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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