Yardeni: Solid Upside Awaits Economy, Markets if Fiscal Cliff Avoided

The U.S. economy and markets are poised to make noted improvements next year if policymakers steer the country away from the fiscal cliff, said Edward Yardeni, president and chief investment strategist at Yardeni Research.

Much attention has been given to the consequences of going over the fiscal cliff, a combination of tax hikes and deep government spending cuts set to kick in at the same time at the end of the year.

The nonpartisan Congressional Budget Office has warned that the economy could contract 0.5 percent if Congress and the White House fail to strike a deal involving politically touchy tax and spending reforms, with fears of mounting jobless rates and rising taxes as consequences of failure.

Editor's Note: The Truth About the Economy — Government Documents Lead to Eerie Conclusion

Too little attention has been paid to the upside of striking a meaningful plan that steers the country away from the cliff, Yardeni said.

“Little has been said about the positive consequences if there is a deal to avoid going over the cliff, even if it leaves plenty of unresolved issues for serious negotiations sometime next year. That is unfortunate, because if both sides were more aware of the upside, they might be less willing to countenance the downside,” Yardeni wrote in a Financial Times OpEd.

“The fact is that the U.S. economy is performing quite well despite the persistent uncertainty about fiscal policy,” Yardeni added.

While the country’s real gross domestic product has been inching along at a sluggish 2 to 2.5 percent average for the past three years, the private sector has been showing increased signs of life as it grows and takes the reins from the government, which has been winding down stimulus measures.

Excluding government spending, the U.S. economy actually been growing closer to 3 to 3.5 percent.

“In other words, the non-farm business sector’s performance does not jibe with the so-called ‘new normal’ scenario of a structural decline in the economy’s potential growth rate,” he wrote.

“That is quite impressive, given the failure of residential investment to recover along with the broad economy, until recently.”

Housing, Yardeni noted, could show marked improvement upon successful aversion to the fiscal cliff.

“If the cliff can be avoided, the housing industry may well contribute significantly to another year of solid growth in the private sector in 2013,” Yardeni stated.

Should housing prices rise, consumer confidence will improve with them and drive broader economic recovery.

While the European debt crisis and uncertainty as to whether China will resume more robust growth rates might cut into earnings, stocks could gain next year if U.S. consumer sentiment improves and entices investors out of bond funds and back into equities.

While the United States will still battle headwinds in the form of hefty debt burdens that cut into growth, better days do lie ahead.

“In brief, the long-term outlook for growth is poor because debt levels are too high and productivity too low,” Yardeni wrote.

“Maybe so but the U.S. economy has proven remarkably resilient. The information technology revolution that started in the 1990s is likely to provide countless innovations in the fields of energy, healthcare, education, robotics and many more.”

Fears the country will careen over the fiscal cliff pushed the Thomson Reuters/University of Michigan preliminary index of consumer sentiment to a seasonally adjusted 74.5 for December, well below 82.7 in November and below market forecasts for a reading of 82.4.

“It’s a disappointing and surprising number. A very large plunge. It looks similar to what was going on in the summer of 2011 when the debt-ceiling crisis was reaching a fever pitch. And it looks like this might be what is going on here,” said Guy Berger, an economist at RBS Securities in Stamford, Conn., according to Reuters.

“Consumers’ views about their present situation are not getting worse, but they are more pessimistic about the future. There’s a lot of uncertainty going forward.”

Editor's Note: The Truth About the Economy — Government Documents Lead to Eerie Conclusion