We are holding a slim hope that the President and Congress will come to a stop-gap agreement to defer, once again, the tough decision making until later. We think that they will agree a temporary resolution to delay portions of the tax increases and spending cuts. Specifically, we think they will come to agreement on indexing the Alternative Minimum Tax (AMT) to inflation, which will reduce the number of people scheduled to be subject to it from approximately 30 million people to approximately 4 million people. We also think that they will agree to postpone some of the automatic spending cuts until sometime after the new Congress comes in. Hope springs eternal!
Over the past months we have seen the economic conditions in the US continue to improve. Unemployment has come down faster than consensus expected. Housing has ramped up. Consumer sentiment is holding steady at a higher rate than seen in a while. The labor market showed a resilience post-Sandy that was unexpected, thus the non-farm payrolls were up more than had been expected for November. The December home builder sentiment report rose to its highest level since April 2006, and the home building trend is increasingly positive. Income growth for consumers has continued to remain positive, as measured by withholding tax receipts. Withholding tax receipts are a good measure for economic activity as, unlike other metrics, receipts are never revised later. What you see is what you get, and what we’ve been getting is a growth in tax receipts to the tune of +3.2% last quarter, and households are generating nominal positive gains in income. This follows on Q2 receipts growth of 3.4% and explains why consumer spending has been somewhat resilient in the face the fiscal cliff bad news.