Fiscal shelves?

When the US government passed legislation at the eleventh hour to avoid the so-called ‘fiscal cliff’ – a combination of automatic tax increases and spending cuts due in January that were widely expected to push the economy back into recession – it wasn’t just President Obama that breathed a sigh of relief. 

In the final quarter of last year, US buyout volume was nearly 30 percent down on the previous quarter, and almost 50 percent down on the same period in 2011, according to Mergermarket – “as the US election and prospective fiscal cliff took their toll”. 

“Financial transactions, the use of leverage and things like that just weren’t going to happen until the fiscal cliff came to a head,” says Greg Braca, head of corporate and specialty banking at TD Bank. Now, he suggests, people will “start putting some liquidity to work”.

But while the cliff may have been avoided, investors still face continued uncertainty in the coming months, given the kick-the-can nature of the deal. The agreement resolved the immediate question of whether taxes would go up on all Americans (instead, the hikes were limited to higher income households – and carried interest escaped unscathed). But it delayed until March any action on the US government’s legal borrowing limit or the scheduled across-the-board cuts to federal agencies.

The good news is that this didn’t come as a complete surprise. A recent Deloitte survey of CFOs at some of North America’s largest public and private companies found that 59 percent of CFOs surveyed actually expected an agreement that merely modified or delayed the scheduled spending cuts.

“The projections they’ve been providing built in the idea that the fiscal cliff was going to be more of a set of fiscal shelves, and that they were going to be dealing with it again,” says Greg Dickinson, director of the North American CFO survey.

Despite this expectation of continued uncertainty in the short term, given the “strong concern about gridlock in Washington and the inability of political parties to compromise”, the survey suggested a potential silver lining for corporate America: improved economic conditions in the medium term.

CFO expectations for year-on-year sales growth rose from 4.8 percent during the previous quarter’s survey to 5.6 percent, on average, while earnings growth predictions jumped from 8 percent to 10.9 percent.

“We could be seeing projections of contraction in sales earnings, hiring, capital investment etc., and we’re not,” Dickinson says. “We’re just seeing rates that we’d like to be a lot better given that we’re trying to dig out of an economic downturn.”

It won’t be long before the fiscal issue raises its ugly head again: the US government will have to raise its legal borrowing limit between 15 February and 15 March in order to meet its obligations. In addition, new legislation must be passed by 1 March in order to avoid automatic spending cuts kicking in. And by late March, the US will need to pass its next spending bill to fund the federal government. 

Nonetheless, among the CFOs surveyed, hope apparently springs eternal that a solution will be found – and that the economy will bounce back.

“Despite all of this uncertainty and really tough economic conditions, people are still predicting that things are going to get better,” says Dickinson. “Modestly [so], but better.”