Economic Humpty Dumpty

Just because the US Congress has finally agreed on a bill to avert the so-called "fiscal cliff" doesn't mean the economy is out of danger or that industries like the electronics and high-tech markets aren't still in jeopardy from the underlying problems that created the months-long nightmare. In other words, Congress jumped over the "fiscal cliff" but didn't plug the chasm. They'll be coming back this way soon, and the cliff will still be there, deeper and more threatening.

OK, now that I've got that out of the way, let's move on to what's really important to this industry. It's possible that the bill approved by the House of Representatives would have already been signed into law by the time this blog goes live. The president is eager to sign it and lawmakers -- both those who supported it and those who voted against it -- want it out of sight so they can pretend the nagging issues they skirted in drafting it have all gone away.

They haven't. The unemployment rate is still high in the United States and some economists actually think it may even inch higher in the first quarter due to the damages done by the protracted negotiations. Some small businesses and midsized companies actually froze hiring plans in the fourth quarter of 2012 while waiting for Congress to act. Businesses don't like uncertainties and US lawmakers have become quite infamous for never doing whatever they are supposed to do until the last minute.

That trend towards brinksmanship is still a strain on the economy and will continue to negatively influence hiring, capital equipment, and other operational decisions at companies in the US and worldwide. The details of the current agreement are not important enough to dwell on here, but the fact Congress passed on other major elements of the fiscal cliff will mean continued uncertainties in several economic segments of significance to the electronics industry.

The defense industry will feel the pinch. For one, Congress has pushed out "for two months automatic cuts to the Pentagon and other agencies that had been set to take effect Wednesday," according to the Washington Post report cited above. Imagine if your company supplies components to key US Department of Defense weapons or aircraft programs but the Pentagon isn't sure if it would have to eliminate the project. The procurement orders for such programs are probably on hold right now and will be for some time. In fact, the Pentagon will continue to review all of its ongoing or planned projects knowing some of them won't make it off the drawing board and others may have to be killed. Suppliers aren't and shouldn't be devoting millions of R&D dollars to projects that may be scrapped.

The biggest hobbling effect from the fiscal cliff, however, comes from Congress's inability to tackle the high Federal debt and weak employment situation in the country. For quite a while, investors and manufacturers have been concerned about US deficit spending and growing national debt. Nothing in the bill averting the January 1 fiscal cliff addressed these two problems. Neither the Senate nor the House of Representatives even focused on any action to stimulate hiring. They simply ignored President Barack Obama's request for $50 billion in additional economic stimulus.

They also didn't do anything about a looming borrowing limit facing the US government. The country could default on its interest payments within the next two months if Congress does not agree to raise the debt ceiling. That tussle over whether or not to raise the debt ceiling and the terms of an agreement between the President and the Democratic Party on one hand and the Republican-controlled House and its Tea Party allies on the other hand will begin over the next few weeks.

How do you think it will be resolved, and will action be swiftly taken? I can answer the second half of that question. No. Congress will, as usual, wait until the last minute to make a decision. More worrying, though, is the idea of allowing the country to default on its loan payments for the first time. Many in the Tea Party movement are ready to push the country to that edge. Imagine what this would do to the global economy and consumer confidence.

It doesn't matter what business you are in -- this is one cliff the country can't afford to go over, but it's also the cliff some would like us to plunge into notwithstanding the cost. I call it the Economic Humpty Dumpty. Go over it and you won't be able to put the economy back together again since we would have eradicated a record: The US would for the first time be defaulting on its loan interest payments.

How do you put that crumpled record back together again and rekindle global confidence in the world's biggest economy?