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Looming 'fiscal cliff' is hurting US economy now, economists warn

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It's showing up in surveys of businesses, including in the informal "beige book" interviews conducted by the Federal Reserve, Mr. Davis says. He also cites recent research, which he conducted with economists Scott Baker and Nicholas Bloom of Stanford University, on the link between policy uncertainty and economic growth. The researchers drew on several data sources to create an index of uncertainty, and found that a spike in such doubt often foreshadows weakness in the economy.

"When policy uncertainty levels are high, that does not bode well for future economic performance," Davis says. In his view, a new recession is possible, with risk coming from events in Europe as well as the US.

The fiscal cliff, by some estimates, could suck about 5 percentage points out of gross domestic product in 2013, if various tax cuts expire as scheduled, alongside some spending cuts.

Many forecasters share Davis's concern, at least to some degree. 

Economists at the investment bank Morgan Stanley recently downgraded their outlook for US gross domestic product (GDP) in the second half of this year, citing "headwinds" from turmoil in Europe and the fiscal-policy doubts at home.

Looking further ahead, the team at Morgan Stanley expects that, ultimately, Congress and Mr. Obama will agree to a deal during the "lame duck" session of Congress, after the election. Essentially, the Bush-era tax cuts would be extended and spending cuts delayed, but the phaseout of some tax breaks would still total about 1.5 percent of GDP. That would exert some slowing influence next year – but not be bad enough to cause a recession.

Some forecasters are more pessimistic.

Economist Peter Morici of the University of Maryland wrote in a recent commentary that if Obama and Congress continue to delay dealing with the fiscal cliff, the economy could suffer sharply.

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