Fiscal cliff could threaten US manufacturing

on Monday, December 24, 2012

Fiscal cliff could threaten US manufacturing Even though many reports have claimed domestic manufacturing is on the rise, the increased production seen in the U.S. could be impacted by the impending "fiscal cliff." If the federal government fails to reach a budget and deficit reduction deal by the end of December, this cliff - a combination of tax hikes and deep spending cuts - will be implemented automatically.

Growth could be hindered by fiscal cliff
As the economy struggles to recover, manufacturing in the U.S. has hit a new high, despite companies often enjoying lower operating costs by moving their operations overseas. Reuters reported that the sector grew at the fastest pace in eight months this December and showed continuous signs of improvement through the end of the year. The preliminary manufacturing Purchasing Managers Index jumped to 54.2, a rise from November's reading of 52.8.

However, this growth could very well be stunted if no agreement is reached the country goes over the fiscal cliff. The Congressional Budget Office reported that if this worst-case scenario occurs, the economy is at risk of falling back into a recession and the outlook for business in general is not bright. The report estimated that budget cuts and taxes would shrink the nation's GDP by 0.5 percent in 2013, and unemployment would rise to roughly 9 percent in the second half of the year.

This would have a tremendous impact on the manufacturing industry and cause many companies to cut back on production and potentially lay off employees they cannot afford to keep on.

Decline likely if spending cuts and tax hikes implemented
Daniel Meckstroth, the chief economist at the Manufacturers Alliance for Productivity and Innovation (MAPI) told Industry Market Trends magazine that even though the manufacturing industry is set to expand by 2 percent in 2013, the fiscal cliff could cause production to instead decline by 1 percent.

Government contractors would see large cuts in their contracts, requiring them to cut production and staff, while other companies may find that they are unable to pay higher tax rates while still remaining profitable and experience a subsequent decline. This could result in fewer companies and individuals being able to purchase the very goods U.S. manufacturers are currently making and hinder the domestic production supply chain.

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