Kicking the Cliff Down the Road
Congress Maneuvered Around One Threatening Deadline at Year-end, but Created Another One That Clouds the Economic Outlook

The uncertainty related to U.S. fiscal policy was a hindrance to economic activity through the second half of 2012. "Worried consumers spend conservatively; worried businesses don't expand; worried investors are more risk averse," says Carl Tannenbaum, Northern Trust's chief economist. "None of these is especially helpful to market and economic performance."

Attention was acutely trained on Congress as last year drew to a close. The January 1 accord reached on personal tax rates kept the economy from falling off the fiscal cliff, but it left many issues unresolved. With automatic spending cuts set to become binding at the beginning of March, we're left with quite a bit of budgetary uncertainty as we move through the first quarter.

Some fiscal drag ahead
There was relief in many corners that potential tax increases were curtailed by the American Taxpayer Relief Act. Yet the expiration of the payroll tax holiday will still have an important effect on spending power. "The average household will be taking home about $1,000 less in 2013 as payroll taxes return to normal levels," Tannenbaum says.

Along with higher income tax rates for top earners (which will affect certain businesses, as well), this development is expected to limit consumer spending and constrain GDP growth.

Still to be determined are cuts in government spending that could also dampen economic activity. Current law calls for across-the-board reductions in defense and domestic programs to take hold on March 1. Negotiations surrounding the spending side are expected to be difficult ones.

Economic softness ahead
The tax changes that have been made, combined with potential alterations in spending, should cause the U.S. economy to grow more slowly during the first half of 2013. "After expanding at better than a 3% pace during the third quarter of 2012, we're expecting less than half that rate for the first quarter of 2013," notes Tannenbaum. "From there, though, we anticipate a gradual improvement as budget tensions recede."

In this scenario, we believe unemployment will decline very slowly, the Federal Reserve should continue with its stimulus programs, and interest rates would remain low.

Click the image below to view larger version:

 
©2014 Northern Funds
Home  |   Prospectuses  |   Proxy Voting  |   Privacy  |   Site Map

©2014. This content is for your personal use only, subject to Terms and Conditions. No redistribution allowed.

Not FDIC insured | May lose value | No bank guarantee

An investment in Northern Funds is not insured by the FDIC, and is not a deposit or obligation of, or guaranteed by The Northern Trust Company or any affiliate. An investment in Northern Funds involves risks, including possible loss of principal.

Shares of the Northern Funds are offered only by a current Prospectus and are intended solely for persons to whom shares of US registered funds may be sold. This site shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of shares of the Northern Funds in any jurisdiction in which such offer, solicitation or sale would be unlawful.

©2014 Northern Funds | Northern Funds are distributed by Northern Funds Distributors, LLC, not affiliated with Northern Trust.