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In graphs: US corporates have already fallen off the fiscal cliff

Uncertainty is already detracting from potential 2013 US growth, but by how much?

Is uncertainty about the looming fiscal cliff showdown already damaging the US economy? This question was posed by the Atlanta Fed, which surveyed almost 200 large US companies in November about their sales growth expectations for the coming 12 months.

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The survey found a correlation between growth expectations and the uncertainty companies felt about their prospects: the higher the growth potential and the greater the normal likelihood to invest in capacity, the higher the uncertainty. Top quintile uncertainty was near double the bottom.

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This is a long-running symptom of the past five years, reflecting the degree of volatility caused by the financial crisis and the unusual combination of public and private sector turbulence breeding much greater uncertainty than previous recessions. Can we quantify the impact? Let’s find out!

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Unsurprisingly, quantifying uncertainty has been of great interest to economists. Professor Nick Bloom and Professor Scott Baker of Stanford University have created the Uncertainty Index, modelled on equity volatility and print media references to uncertainty, dating back almost 30 years.

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While much shorter dated, going back to only 1997, the European Uncertainty Index displays a similar pattern to the US version, albeit with a higher 12-month average reading of 173 versus 165. The sustained uncertainty has compounded economic woes, returning Europe to a recession.

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Uncertainty shocks – of the kind which have become instituted as semi-annual events since 2008 – do have a readily definable impact on tangible activity they found, bottoming out at -2.45% of previous industrial output 11 months after a shock. Note the Uncertainty Index is already elevated.

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Uncertainty can also become a self-sustaining phenomenon without external action – action not being something the EU was designed to deliver. Funding costs, for instance, represented here by the 10-year Spanish sovereign spreads over bunds, are locked in a spiral.

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Back to the US, the closer we get to the fiscal cliff, the greater the degree of uncertainty. Here, we project IMF predictions for US GDP, and then that potential with another uncertainty shock priced in – at least a technical recession. For good measure, we have also priced in a second shock.

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