A second recession is coming if the Bush tax cuts are not extended and President Obama’s planned spending cuts are implemented.
So said the Congressional Budget Office in a report released this afternoon.
The CBO painted a very black-and-white picture of the economy in laying out two paths U.S. lawmakers could take – neither of which sound too appetizing.
If lawmakers do not renew the Bush-era tax cuts, which are set to expire at the end of the year, and impose $100 billion in planned government and military spending cuts, then the economy is likely to contract 2.9% in the first half of 2013. However, doing to would slash the projected $1.13 trillion deficit almost in half by the end of next September, according to the Congressional Budget Office.
On the other hand, if the Bush tax are extended and government spending cuts are postponed another year, the U.S. economy would grow 1.7% next year and 2 million more jobs would be created. But our national deficit would remain in the trillions, the CBO estimates.
Not exactly ideal choices either way – though the words “possible recession” certainly puts some pressure on Obama’s re-election campaign. If elected, Mitt Romney has pledged to extend the Bush tax cuts and would implore Congress to put the government spending cuts on the backburner.
So the Congressional Budget Office report was certainly good fodder for some more pre-election mudslinging – as if we needed more.
For investors, the CBO’s report simply says this: Stocks aren’t going to stay near four-year highs much longer. If America is indeed headed for a “fiscal cliff” regardless of what lawmakers decide, then there’s going to be some suffering at some point in the coming months.
That doesn’t necessarily mean you should sell all your stocks now and hunker down behind some low-beta dividend stocks and a few bars of gold.
But it does mean that a correction in the market is likely, even if investors didn’t immediately begin selling off their shares after hearing the doom-and-gloom news today.