U.S. struggles as fiscal cliff looms

The U.S. economy may be recovering, but it’s still struggling with the weakest recovery since the Second World War, says the Conference Board of Canada’s U.S. Outlook-Autumn 2012 report.

It forecasts the situation could get much worse if the U.S. falls over the looming fiscal cliff, which would snuff out growth in both the U.S. and Canada.

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The report predicts real gross domestic product will grow by only 2.3% this year and by 2.4% in 2013. This depends on whether Congress and the White House will reach an agreement to avoid automatic spending cuts and tax increases, however.

“The U.S. economy will take a major step toward finally breaking free from the clutches of the 2008-09 recession if the United States Congress and Administration manage to make some headway in solving the nation’s daunting fiscal challenges,” says Kip Beckman, principal economist.

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The fiscal cliff refers to the combination of tax increases and spending cuts totaling more than $700 billion—5% of the U.S. economy—that are set to take effect automatically in January if other deliberate fiscal policy action is not taken.

Read: U.S. can’t pay the bills

Congress has several options as the deadline approaches, but the default option is to do nothing and allow the tax increases and spending cuts to take effect next year. And while the federal balance sheet would improve immediately if this is allowed, it would come at a huge price.

The U.S. would fall back into recession in the middle of 2013, with the unemployment rate and the economy is too fragile to handle sharp tax increases and cuts in government spending, says the report.

One option for the government would be to extend the current tax and spending policies into 2013. The report suggests this would maintain the fiscal status quo and would have a positive short-term positive effect on U.S. growth.

It would likely lead to a U.S. credit rating downgrade, though, and the ongoing trillion dollar annual deficits would hurt the economy over the longer term.

Read: Moody’s could downgrade U.S.

The final option involves reaching an agreement between the Congress and the White House that allows the federal government to gain some control over its long-term finances.

But not all the news about the U.S. economy is gloomy, reminds the report; most firms are in excellent financial shape; banks are well capitalized and have resumed lending; and households have made a huge dent in their debt burdens.

Read: Canadians befuddled by debt and Canadians in more debt than expected

The troubled housing market is also showing signs of life, with home prices and housing starts having majorly rebound in many parts of the country.

Read: U.S. home construction at 4-year high