Going into the fiscal cliff, the US economy looks much the same as it did at the start of the year – it is characterized by slow, but positive growth. Recent economic indicators have presented a mixed-bag on the state of the economy, with some indicators improving, but most coming in flat or down slightly.
On the plus side, we’ve seen some uptick in manufacturing activity, evidenced by a jump in the ISM New Orders Index. Gas prices have also moderated somewhat, although the employment picture remains mixed with net-new job creation stuck at around 150,000 a month. One troubling indicator is the Chicago Fed National Activity Index [CFNAI]. The CFNAI fell again in October to -0.56, and a reading below zero means the economy is growing slower than its potential. The CFNAI is a particularly reliable leading indicator, and the latest reading is consistent with annualized GDP growth of 1.50% to 2.0% for the current quarter and the first quarter of next year. But one qualitative factor to keep in mind is that we may see an unexpectedly weak fourth-quarter GDP number due to the effects of Hurricane Sandy.
The economy is growing, but it is doing so at a rate that is well below trend, and the United States is likely to limp into year’s end. This is not a great environment should we take a trip over the fiscal cliff.