WASHINGTON — Both major political parties talk a good game on the need to help create jobs. But their refusal to agree on a plan to stop the government from going over a “fiscal cliff” at the end of the year is driving American businesses to delay hiring and in some cases to actually trim their payrolls.
Employers see last summer’s showdown over the U.S. debt ceiling not only as a self-inflicted wound that hurt the economy, but as a likely template for the same kind of gridlock and brinksmanship this fall. If Congress and the White House cannot agree, taxes will increase across the country as Bush-era tax cuts expire on Dec. 31, and spending will be cut at the Pentagon and elsewhere in the federal budget, automatic cuts written into law last summer as a doomsday trigger to force Washington to negotiate more thoughtful reductions.
With scant prospects for compromise as of now, American companies aren’t waiting to see how it all plays out. Big U.S. corporations, ranging from aerospace firms to defense contractors, say they’re taking action now.
“The cold-eyed view is there is paralysis and it is likely to be a last-minute thing,” said Jim McNerney, CEO of Boeing Co. and chairman of the Business Roundtable, the lobby for big corporations.
In a conference call with reporters, McNerney revealed last week that Boeing is already firing workers ahead of what’s expected to be a fractious political debate that may not resolve tax and budget issues in a lame-duck session of Congress following the Nov. 6 presidential election. McNerney wouldn’t say where the layoffs were occurring or in what divisions of Boeing.
Texas businesswoman Della Williams finds herself in a bind. She runs a Fort Worth company, Williams-Pyro, that supplies electrical components used in fighter jets. Her workers are coming to her seeking assurances that there won’t be layoffs because of Washington gridlock, and she can’t give them the reassurance they seek.
“We don’t really know. You have to make them aware that that’s the possibility,” said Williams, who was in Washington as part of a group of defense contractors that together with the National Association of Manufacturers were knocking on the doors of lawmakers.
Like Boeing, Williams-Pyro is reluctant to hire, she said, unsure that programs about to start or recently started will actually be funded. “That’s true all the way down the supply chain . . . all the suppliers,” she said.
When reaching out to lawmakers, Chad Moutray, chief economist for the National Association of Manufacturers, finds little confidence that Congress and the White House will find a solution. “It adds a lot of uncertainty. No one that I’ve spoken with expects much to happen,” he said.
The threat doesn’t just weigh on employers. Employees unsure if they’ll be furloughed or let go later this year tighten their belts. They hold off on vacations or purchasing a new car.
“This uncertainty is pretty lethal, and you have in Congress this optimism that we will handle this in the lame-duck (session). . . . What happens if it isn’t handled?” said John Engler, a former Michigan Republican governor and head of the Business Roundtable.
The expiring tax cuts create the potential for a tax increase for most Americans. They’d also face higher payroll taxes, the return of a creeping tax on middle- and upper-income earners called the Alternative Minimum Tax, as well as higher taxes on capital gains and dividends from investments.
Separately, the federal budget could be subjected to sequestration, a process of deep cuts in all discretionary spending beyond mandatory programs such as Social Security.
The political uncertainty led Beth Ann Bovino, deputy chief economist in New York for the credit-rating agency Standard & Poor’s, to downgrade her forecast for growth prospects in the second half of 2012. She anticipates a worried consumer in an economy where consumption accounts for about two-thirds of economic activity.
“I expect to see a slowdown in consumer spending, because the worries (of consumers) are what can they expect next?” she said, adding that people save more when expecting higher taxes. “The other factor is, if we do see a pullback in hiring, which we’ve already seen a bit of, if that starts to make more headlines, people are going to be more worried about that as well. Even if I have a job this week, will I have it the next?”
Gridlock between Congress and President Barack Obama is also a source of frustration to Federal Reserve Chairman Ben Bernanke. In a June 21 news conference, the Fed chief said it adds a headwind to the list of headwinds that include a moribund housing and construction sector, Europe’s widening debt woes and an economic slowdown in China and the rest of Asia.
While inaction is a possibility, Bernanke suggested another concern is that Congress again offers a temporary extension of tax cuts later this year that simply prolongs the uncertainty for another year.
“And simply kicking the can down the road without any other indication of what might be done, what kinds of policies might be enacted, could be a negative for sentiment because it might induce people to worry more about the seriousness of Congress in addressing our fiscal issues,” Bernanke said.