(MoneyWatch) As fast as you could say "second term," attention immediately shifted from Election 2012 to the nation's looming "fiscal cliff". It's seven weeks before the combination of tax increases (from the expiration of Bush-era tax cuts and President Obama's temporary tax cuts) and across-the-board reductions in government spending, that resulted from the debt ceiling negotiations, are scheduled to go into effect. For 2013, the tax increases total $532 billion and spending cuts will be $136 billion.
If no deal occurs before the end of the year, it's estimated that 80 to 90 percent of Americans would see some form of tax increase next year. The Tax Policy Center estimated that taxes would jump by almost $3,500 per household as a result of the fiscal cliff, while middle-income households would see an average increase of almost $2,000.
Last week, the Congressional Budget Office (CBO) released an updated report on the economic effects of the fiscal cliff. (The original CBO report was released in August.) According to the CBO, jumping off the fiscal cliff would shave 3 percentage points from GDP and spark a recession in 2013. Extending all tax cuts would boost the economy by a about 1.5 percent, while allowing tax cuts to expire for households earning more than $250,000, a position supported by President Obama, would curtail growth by 0.25 percent.
Ratings agency Fitch also weighed in on the fiscal cliff, warning that unless Congress and the president come to an agreement quickly, the United States' coveted AAA sovereign bond rating could be lowered next year. The stakes are high, which is why Speaker of the House John Boehner wasted no time in staking out the Republican position: "With this vote, the American people have also made clear that there is no mandate for raising tax rates."
What Boehner did not say is that he was against any form of increasing revenue; but doesn't want that increased revenue to come by raising marginal tax rates. In an effort not to box himself or anyone else in, Boehner said "Revenue is on the table," and in fact, there has been speculation that House Republicans might be OK with capping itemized deductions for the wealthy, another means for the government to collect more money.
President Obama used his first speech after the election to discuss the fiscal cliff, noting that he wants to reduce the deficit in a "balanced and responsible way," where the "wealthiest Americans pay a little more in taxes." He did not demand that tax rates rise to collect that extra money and perhaps in a nod to Boehner, the president acknowledged "I'm not wedded to every detail of my plan...I'm open to compromise, to new ideas."
Investors had a message for lawmakers and the president: "We remember the debt ceiling debate and we do not trust you." Stocks tumbled 3.6 percent in the two days after the election and most traders expect that market volatility will remain high until there is a resolution in D.C.
So be prepared for it to be all fiscal cliff, all the time for the foreseeable future, and especially in the next couple of weeks leading into Thanksgiving, because the economic calendar will be fairly light. This week, there will be readings on inflation at the wholesale and consumer levels, both of which are expected show slight increases. Investors will be interested in whether the recent uptick in consumer sentiment to a five-year high will translate into an increase in retail sales, and if regional manufacturing reports will reflect the recent gains in exports.
-- DJIA: 12,815, down 2.1 percent on week, up 4.9 percent on year (down 4 percent over last 3 weeks)
-- S&P 500: 1,379, down 2.4 percent on week, up 9.7 percent on year (worst week since the week ending 06/01)
-- NASDAQ: 2,904, down 2.6 percent on week, up 11.5 percent on year (down 7.4 percent over the last 5 weeks)
-- December Crude Oil: $86.07, up 1.4 percent on week
-- December Gold: $1,730.90, up 3.4 percent on week (biggest weekly gain since 1/27, up 10.5 percent on year)
-- AAA national average price for gallon of regular gas: $3.44 (down $0.35 from month ago, matches year-ago level)
THE WEEK AHEAD:
Mon 11/12: Veteran's Day (stock markets open, bond markets, banks closed)
Eurozone finance ministers meeting
Cisco, Home Depot
7:00 MBA mortgage purchase applications index
8:30 Producer price index
8:30 Retail sales
2:00 FOMC minutes
Gap, Target, WalMart, Dell, Intuit, Viacom
8:30 Weekly jobless claims
8:30 Consumer price index
8:30 Empire State manufacturing
10:00 Philadelphia Fed survey
Deadline for states to decide if they will establish health-insurance exchanges
9:15 Industrial production