However, “the scale of the drop really intensifies the concerns about the potential economic implications from $600bn+ of tax rises and spending cuts due to hit in less than a week, unless politicians can strike a deal.” notes James Knightley, an analyst at ING. The expectations component fell more than 14 points to leave it at its lowest level for 13 months. In stark contrast though, the present situation component actually rose to its highest reading since the summer of 2008.
This positive story about the current state of the US economy has been backed up by a firm new home sales reading, released at the same time. According to Knightley, “It also shows that if we can get a deal on the fiscal cliff, the US is looking in pretty good shape for 2013.” However, the uncertainty is huge and if a deal isn’t achieved – Senate Majority Leader, Harry Reid, has just been quoted as saying going over the fiscal cliff “looks like where we’re headed” – then a return to recession is a realistic possibility.