Term Sheet

The latest on private equity, M&A, deals and movements — from Wall Street to Silicon Valley

What to expect after we fall off the cliff

December 11, 2012: 2:38 PM ET

Bank of America economist Ethan Harris says there's a "decent chance" that Congress won't reach a deal by January 1. He's lowered his growth forecast to reflect that.

B of A economist Ethan Harris

B of A economist Ethan Harris

FORTUNE – Bank of America's top U.S. economist Ethan Harris thinks the U.S. economy will probably tip over the fiscal cliff – the mix of spending cuts and tax hikes set to kick in on January 1 if Washington lawmakers don't get their act together before the end of the year. The stalemate has been gnawing on corporate America and consumers, but the good news is that Harris doesn't think going over the cliff spells another recession.

However, America's debt woes, along with Europe's, could mean the economy will grow slower next year. Harris forecasts GDP will grow 1.5% in 2013, slightly above the 1.4% he predicted over the summer but markedly lower than his forecast of 2.1% growth for all of 2012.

"There's too much to do in too little time," says Harris, who was among the earliest economists on Wall Street to warn about the fiscal cliff. It probably won't be until spring before Congress will fully reach a debt reduction plan, he says.

MORE: Why quantitative easing isn't working

Harris's remarks come the same day U.S. House Speaker John Boehner (R-Ohio) said he was hopeful that Congress could strike a deal before the end of the year. Negotiations have turned around in recent days after months of stalled talks.

If the economy falls over the cliff, it's likely that it will play out more like falling over a slope than a cliff, as some economists have suggested. Higher taxes and spending cuts, including the end of the payroll tax cut, will almost certainly weigh down growth during the fist part of 2013, Harris predicts. And Europe's ongoing debt crisis won't help either. But U.S. growth should pick up during later half of next year.

The question is when will the rest of the nation besides corporate America and Washington start feeling the pangs of the looming cliff? Up until recently, consumers appeared more hopeful than others that Washington will soon get the nation's fiscal house in order. That sentiment seemed to shift last week, when consumer confidence dipped to a four-month low. If Harris's forecast pans out, expect the rest of us to start feeling it early next year.

Join the Conversation
About This Author
Nin-Hai Tseng
Nin-Hai Tseng
Writer, Fortune

Nin-Hai Tseng covers economics and finance. Before joining Fortune, Tseng was a reporter at The Orlando Sentinel and a public affairs associate at GE. She holds an MPA from Columbia University and a BS in Journalism from the University of Florida. She lives in New York City.

Email | @ninhaitseng | RSS

Current Issue
  • Give the gift of Fortune
  • Get the Fortune app
  • Subscribe
Powered by WordPress.com VIP.