Firms waiting out political stalemate

A rising number of manufacturers are canceling new investments and putting off new hires because they fear paralysis in Washington will force hundreds of billions of dollars in tax increases and budget cuts in January, undermining economic growth in the coming months. ASSOCIATED PRESS Enlarge

NEW YORK -- A rising number of manufacturers are canceling new investments and putting off new hires because they fear paralysis in Washington will force hundreds of billions of dollars in tax increases and budget cuts in January, undermining economic growth in the coming months.

Executives at companies making such items as electrical components, power systems, and automotive parts say the fiscal stalemate is prompting them to pull back now, rather than wait for a possible resolution to the deadlock on Capitol Hill.

Democrats and Republicans are far apart on how to extend Bush-era tax breaks beyond January, the same month automatic spending reductions are scheduled to take effect unless there is a deal to trim the deficit.

The combination of tax increases and spending cuts is creating an economic threat dubbed "the fiscal cliff" by Ben Bernanke, chairman of the Federal Reserve Board.

Until recently, the loudest warnings about the economy have come from policy makers and economists, along with defense industry executives who rely heavily on the Pentagon's largess and who would be hurt by the government reductions.

But more diversified firms, such as Hubbell Inc. in Shelton, Conn., have begun to hunker down.

Hubbell, a maker of electrical products, has canceled several million dollars' worth of equipment orders and delayed long-planned factory upgrades in the past few months, said Timothy Powers, the company's chief executive.

It has also held off hiring workers for about 100 positions that would otherwise have been filled, he said.

"The fiscal cliff is the primary driver of uncertainty, and a person in my position is going to make a decision to postpone hiring and investments," Mr. Powers said. "We can see it in our order patterns, and customers are delaying. We don't have to get to the edge of the cliff before the damage is done."

The worries arise amid broader fears that the economy is losing momentum -- the annual rate of economic growth in the second quarter fell to 1.5 percent from 2 percent in the first quarter, and 4.1 percent in the last quarter of 2011.

All told, the political gridlock in the United States, along with the debt crisis in Europe, will shave about half a percentage point off growth in the second half of the year, Vincent Reinhart, chief U.S. economist at Morgan Stanley, has estimated.

Mr. Reinhart said he expects that portion to rise when the poll is repeated this month.

"Economists generally overstate the effects of uncertainty on spending, but in this case it does seem to be significant," he added. "It's at the macro and microeconomic levels."

Unless Congress acts to extend the tax provisions and comes up with a budget deal that averts the planned reductions in military spending and other government programs, taxes will rise by $399 billion while federal government spending will fall by more than $100 billion, according to an analysis by the Congressional Budget Office.

The end-of-year battle comes after Democrats and Republicans have failed over the past year to reach long-term agreements on how to tackle the budget deficit.

Last week, congressional leaders did manage to tentatively agree to keep the government funded through March, extending a deadline that had been set to expire Oct. 1, but that deal did not address the extension of the tax cuts or spending reductions.

All together, the fiscal cliff's total impact equals just over $600 billion, or 4 percent of gross domestic product.

If no action is taken, the Congressional Budget Office projects, the economy will shrink by 1.3 percent in the first half of 2013 as a result.

In Washington, powerful business lobbies such as the National Association of Manufacturers, the Business Roundtable, and more specialized groups such as the National Electrical Manufacturers Association have grown more vocal about their frustration with the inaction of Congress, and the possible dangers ahead.

"It's totally irresponsible and absolutely insane," said Evan Gaddis, president of the electrical manufacturers' association. "The two parties are really dug in. Companies see the writing on the wall and business decisions are now being made on this."