SALT LAKE CITY — Current law will send the U.S. economy into recession at the beginning of 2013, according to analysis by many private firms and the Congressional Budget Office (CBO). What happens at the beginning of 2013? At the beginning of 2013, if policymakers in the U.S. do not act, a combination of tax increases and spending cuts will hit the economy. This culmination of years of bad policy is known as the "fiscal cliff".

One could reasonably expect the looming prospect of a large tax increase and recession would dampen the mood of American consumers, but that just isn't the case. Last week the Reuters/University of Michigan consumer sentiment index increased to its highest level since September of 2007. In other words, consumers haven't been this upbeat since before the Great Recession began.

However, this positive sentiment is not shared by many who are familiar with the looming fiscal cliff, including policymakers and business leaders. Recently, the Business Round Table (BRT), an organization that includes many of the country's largest and most influential businesses, published the results of a quarterly survey of CEOs. Sentiment among chief executives fell to its lowest level since the third quarter of 2009. Also, according to the BRT survey, 34 percent of CEOs expect the number of people employed at their company to shrink, while just 29 percent expect that number to increase and 37 percent expect headcounts to remain the same.

Businesses See the Cliff

At the very least, it is apparent that businesses are aware of the cliff and it's beginning to influence their behavior. Why are businesses so concerned about the fiscal cliff? The reason so many are concerned with the fiscal cliff is due to its magnitude and the current state of the U.S. economy. Notable tax breaks set to expire at the end of the year include the Bush tax cuts, alternative minimum tax patch and payroll tax holiday. The Tax Policy Center estimates an average household will see their tax bill rise by $3,700 annually. All together, the tax cuts expiring are worth several hundred billion dollars annually, which will also be coupled with a potentially damaging mix of spending cuts, especially in relation to defense.

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As organizations analyze the impact of the fiscal cliff on their businesses, it is clearly unsettling. Consumer spending accounts for approximately 70 percent of economic activity in the U.S. Consequently, if the ability of consumers to spend is severely restricted by tax increases, demand for goods and services will fall. With the economy growing at a rate of under two percent, it will not be able to absorb such a shock, leading to a recession.

The anticipation of such a dire scenario might seem a little extreme, but it is important to remember that this scenario is already written into law and nothing is being done to resolve it. Further compounding the uncertainty: nothing will be done to address this situation before next month's elections.

Damage Already Done

A common theme among business leaders is an observation of extreme caution among organizations, including their own. Such caution is translating into reluctance to make significant investments for the future. In other words, uncertainty driven by many issues with the potential to affect the macro-economic outlook is causing businesses to be more cautious. As third quarter earnings are announced, evidence of pre-fiscal cliff damage is becoming more apparent. For example, Cummins - an engine maker - cited heightened uncertainty as a primary reason for lower product demand. As a result, the company announced it is planning to cut as many as 1,500 jobs.

Furthermore, the CEO of Cummins said this, "As a result of the heightened uncertainty, end customers are delaying capital expenditures in a number of markets, lowering demand for our products." Capital expenditures (capex) can be characterized in broad terms as business spending on infrastructure or equipment. According to data compiled by Bloomberg, capital expenditures have been falling dramatically for the last several months. The bottom line is this: the fiscal cliff is already affecting the economy.

While recent indicators are showing consumer sentiment improving, the disconnect in sentiment between decision makers and consumers is striking. Although the fiscal cliff can seem like an abstract problem far out in the future, it should be noted that the anticipation of such an event is already exacting damage on the economy. Consumers will likely grow more pessimistic as these types of headlines continue.

Election Impact

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Much of the uncertainty surrounding the fiscal cliff has to do with the fact that the eventual outcome will be determined by another variable: November's elections. Elections always have consequences, but the impact of this election will be experienced in a particularly rapid manner. After the election, congress will have only a matter of weeks to address the fiscal cliff before laws take effect.

If for example, one party were to win control of the House and Senate, plus the White House, such an outcome would give the capacity and political capital necessary to resolve the fiscal cliff issue in a rapid manner. However, if the government becomes more polarized, it is less likely that the issue will be resolved without a higher degree of difficulty.

Choices

It is important to recognize that the fiscal cliff is the result and culmination of years of bad policy with plenty of blame for both parties. Automatic budget cuts are a result of the inability of politicians to put U.S. fiscal policy on a sustainable path. While the expiration of multiple tax cuts at the same time are the result of short-term fixes. Consequently, America now finds itself on the verge of unnecessary economic hardship purely engineered by its leadership.

The time to make tough choices has arrived. Such choices will either be made in a deliberate, confidence-inspiring manner or markets will force those decisions upon the U.S. After November 6th, more will be known about how tough challenges will be approached, but that's just the beginning - when the heavy-lifting must begin. The choice is ours; don't forget to vote on November 6th.

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