If Washington can strike a bargain on the 'fiscal cliff,' some tax hikes and spending cuts would slow the economy. But rising consumer confidence could keep the slow recovery chugging along.
Consider this a sign of hope: As the clock ticks toward Dec. 31 with no fiscal deal in place, the stock market is holding up pretty well.
Investors expect Congress and the White House will find a way to keep the economy from plunging headlong over that much-discussed "cliff" of tax hikes and automatic federal spending cuts at the end of the year.
Getting to congressional "yes" votes within the next 11 days isn't a sure thing, and stock prices could start struggling if the prospects for a deal come into doubt. The fact that the Republican House speaker has been pushing a "Plan B," and Democrats say they'll only consider a "Plan A," is hardly reassuring.
But for now, financial analysts and the markets appear focused squarely on a 2013 environment in which the fiscal cliff is avoided, and the economy stays out of recession.
What would that economy look like?
It would be one with scaled-back federal largess, but possibly enhanced consumer confidence.
A fiscal bargain would put some speed bumps in the nation's path, even though the deal's tax hikes and spending cuts wouldn't be of "cliff" magnitude. The policy changes might exert a slowing force equal to 1 to 2 percent of economic activity.
The good news, though, is that a deal would reduce a substantial amount of uncertainty about fiscal policy, giving businesses and consumers the confidence to offset that fiscal drag with some fresh spending.
Economists warn that financial uncertainty won't disappear entirely. It appears likely, for example, that a near-term fiscal deal will merely set the stage for more bargaining next year over reforms to costly entitlement programs, and over further tax reforms.
Add this all up, and forecasters see next year as a time of tepid economic growth, with gross domestic product (GDP) expanding by about 2 percent even as taxes rise modestly and doubts about America's long-term fiscal health persist.