Can the U.S. economy endure the fiscal cliff?

Fiscal cliff sign economy stock generic CBS/iStockphoto

(MoneyWatch) The U.S. economy may be stronger than originally thought. The second revision to third quarter GDP is expected to show that the economy grew by 2.8 percent, a big jump from the originally-reported 2 percent. The news would add to an improving global picture, where last week there was a bit of good news from both Asia and Europe. China's manufacturing sector expanded, just barely, for the first time in 13 months and in Europe, the manufacturing and services composite index stabilized, though admittedly, the index remains at near the lowest level since June 2009.

Still, the U.S. economy faces some big headwinds. The so-called fiscal cliff will occupy legislators and the president until the Christmas break. Yet many analysts are now downgrading the impact of the combination of tax increases and spending cuts, assuming that even if the year-end deadline passes, a deal that is consummated in January or February would not cause significant damage to the economy. Instead of a fiscal cliff, investors should prepare for more of a fiscal slope, in which the impact on financial markets is more or less immediate, but the economic damage only multiplies over a number of months.

The intent of the payroll tax holiday was to stimulate consumer spending and aid middle-income households. The cut helped 160 million American wage earners reduce their tax bills, but with deficit and debt reduction center stage, the rate is likely to return to rise next year. JPMorgan estimates that the payroll tax hike "will reduce U.S. disposable income by $125 billion" which would be a drag on consumer spending and could reduce GDP growth by over half of a percent next year.

On the plus side two of the biggest impediments to growth, the pullback in state and local government spending and housing, are diminishing. Data this week should support expectations of a slow but sustainable housing recovery. Even slightly improving prices will likely boost household wealth, help homeowners with underwater mortgages to refinance and improve confidence.

Maybe exchanges should consider trading for 3 1/2 days per week. In a holiday-shortened week, indexes gained 3.5 - 4 percent, the best weekly performance in five months.

-- DJIA: 13,009, up 3.3 percent on week, up 6.5 percent on year

-- S&P 500: 1,409 up 3.6 percent on week, up 12 percent on year

-- NASDAQ: 2,966 up 4 percent on week, up 13.4 percent on year

-- January Crude Oil: $88.28, up 1.5 percent on week

-- December Gold: $1751.40, up 2.1 percent on week

-- AAA nat'l average price for gallon of regular gas: $3.43

THE WEEK AHEAD:

Mon 11/26:

Cyber Monday

8:30 Chicago Fed Survey

10:30 Dallas Fed Survey

Tues 11/27:

8:30 Durable Goods Orders

9:00 Case Shiller Home Price Indexes

10:00 Consumer Confidence

10:00 FHFA Home Price Index

10:00 Richmond Fed Survey

Weds 11/28:

7:00 MBA mortgage purchase applications index

10:00 New Home Sales

2:00 Federal Reserve Beige Book

Thurs 11/29:

8:30 Weekly Claims

8:30 Q3 GDP (2nd estimate)

8:30 Corporate Profits

10:00 Pending Home Sales

Fri 11/30:

8:30 Personal Income and Spending

9:45 Chicago PMI

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    Jill Schlesinger, CFP®, is the Editor-at-Large for CBS MoneyWatch. She covers the economy, markets, investing or anything else with a dollar sign. Prior to the launch of MoneyWatch in 2009, Jill was the chief investment officer for an independent investment advisory firm. In her infancy, she was an options trader on the Commodities Exchange of New York.

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