A report by the National Association of Manufacturers (NAM), released October 26, warns of the economic crisis that America will face, should the “double whammy” of across-the-board spending cuts of $500 billion and simultaneous increase in taxes take place January 1, 2013. The report by the NAM concluded the following:
- If Congress fails to act before January 1, 2013, large spending cuts and large tax increases will hit the economy at the same time, causing a total fiscal contraction of $500 billion, or about 3.2 percent of GDP.
- Current inaction by Congress is already having an impact, cutting 0.6 percentage points from GDP growth for 2012.
- If the fiscal contraction happens, the economy will almost certainly experience a recession in 2013 and significantly slower growth through 2014.
- From 2012 to 2015, the economy will lose 12.8 percent of the average annual real GDP it could have attained with moderate growth, sapping critical resources from all economic sectors.
- By 2014, the job losses will be quite devastating; the fiscal contraction will result in almost 6 million jobs lost, and the unemployment rate could reach more than 11 percent.
- Real personal disposable income per household will drop almost 10 percent by 2015.
- Manufacturers of consumer goods and defense contractors likely will see large and durable contractions in their industries.
- It will take most of the decade for economic activity and employment levels to recover from the fiscal shock. Another recession could deal a substantial blow to long-term economic potential, permanently reducing living standards in the United States.
The USA is currently over 100 percent debt ratio to GDP. The only other time in our country’s history that debt has exceeded GDP was in 1946. This is in stark contrast to where the country was just four years ago in 2008; the ratio was 68 percent debt to GDP. What is the significance of this? It means that our country’s debt is currently larger than our entire economy. It is an indicator that investors use to determine the country’s ability to pay back its debt, thus affecting the ability for the US to borrow money, the rates at which it will payback, and the bond market. A good comparison for the situation that our country is heading toward is to look at Europe, whose debt to GDP ratio is 90%. The US, has the benefit of being a larger economy than Europe and the ability to print more money, as the dollar is the world reserve currency. Because these factors are somewhat of a cushion for the US now, does not mean they will save our country from fiscal crisis if we continue in this direction.