Fiscal Cliff Risks U.S. Recession, BlackRock’s Chief Says
BlackRock Inc. (BLK) Chief Executive Officer Laurence D. Fink said the U.S. economy may shrink at the start of 2013 as companies curb hiring ahead of spending cuts and tax increases from the so-called fiscal cliff.
Business confidence is waning amid the federal gridlock on paring the deficit to avert more than $600 billion in automatic budget reductions and higher taxes on Jan. 1, Fink said today at a Bloomberg Television roundtable on the U.S. debt. Congress also must act in February to raise the debt ceiling, he said.
“We have the threat of going into a recession in the first quarter,” said Fink, who was joined by the CEOs of Nasdaq OMX Group Inc., Honeywell International Inc. (HON) and United Parcel Service Inc. (UPS) “This is a very uncertain moment.”
The CEOs’ demands for an accord between Congress and the Obama administration echoed calls last week by U.K. Chancellor of the Exchequer George Osborne and Canadian Finance Minister Jim Flaherty. “Street Smart CEO Summit: Debt” will be broadcast on Bloomberg Television at 4 p.m. New York time.
The spending cuts were put in place as a threat to ensure an agreement after U.S. leaders couldn’t reach a deal last year to increase the debt ceiling and ensure long-term deficit reduction. Tax cuts enacted under President George W. Bush and a temporary payroll-tax reduction also expire at the end of 2012.
Worldwide growth, not just the U.S. economy, is at stake, Nasdaq OMX CEO Robert Greifeld said. Fallout from a failure would be worse than in August 2011 after Standard & Poor’s cut the U.S. sovereign debt rating from the top AAA grade, he said.
“When the world looked at Congress, who was paralyzed and couldn’t make a decision, it shook up the economy,” Greifeld said. “A bigger day is coming.”
Company leaders are speaking out because they recognize that the political stalemate in Washington runs deeper than the “normal political baloney,” said Honeywell CEO Dave Cote, who served on President Barack Obama’s commission charged with finding ways to reduce a federal debt that now stands at about $16 trillion.
“How we treat this could be a potential disaster or a potential opportunity,” Cote said. “Somebody needs to demonstrate some leadership.”
CEO Scott Davis of Atlanta-based UPS said economic growth is sputtering because executives are struggling to decide on long-term investments without clues to how Congress will deal with the fiscal cliff.
“If they want to stock inventories, they want to hire people, they want to invest in equipment, you have to know the rules of the road more than three or four months out,” Davis said.
The CEOs on the panel spanned financial services, with BlackRock the world’s largest money manager and Nasdaq (NDAQ) OMX operating the second-biggest U.S. equity exchange; diversified manufacturing, with Honeywell making products such as thermostats and aircraft instruments; and transportation, with UPS ranked No. 1 in the world for package deliveries.
The U.S. debt crisis could be turned into an opportunity to spur growth if lawmakers reach an agreement that sets the country on a sounder financial path, said Fink of New York-based BlackRock. Companies now sitting on more than $1 trillion in cash would put that money to work, as would investors who may be shunning equities, he said.
“If this fix is tangible, understandable, and most importantly credible, I believe confidence would be renewed and we would have a new renaissance,” Fink said.
Greifeld of New York-based Nasdaq OMX said the rebound in stocks this year shouldn’t be taken as a sign of confidence. Instead, it reflects the few choices available to investors because of low interest rates, he said.
Many companies are buying back stock and using profits to pay higher dividends rather than pouring money into their businesses, he said. Equity trading volumes at multiyear lows in the U.S. and Europe show there’s “no conviction” behind the rallies, Greifeld said.
The S&P 500 Index climbed 14 percent this year through Oct. 12 after ending little changed in 2011, while the Stoxx Europe 600 Index gained 10 percent to rebound from a drop of 11 percent last year. Greece, now mired in a fifth year of recession, has been at the epicenter of Europe’s debt crisis.
Without an agreement on the U.S. debt, financial markets eventually will “rebel” and interest rates will climb, creating a drag on stocks and boosting the government’s interest expense, BlackRock’s Fink said. Rates have remained low because the Federal Reserve is “printing money,” he said.
Elected officials will have to embrace the idea of “shared pain” and make compromises, Greifeld said. It’s hard for business leaders to understand why politicians can’t strike an agreement when the framework of a deal seems clear, he said.
“For us to address this, there is going to have to be revenue increases, there’s going to have to be spending cuts,” Greifeld said. “No doubt about it.”
Cote of Morris Township, New Jersey-based Honeywell said U.S. leaders can’t postpone a plan to shrink the federal deficit, which has ballooned with shortfalls such as the $1.09 trillion gap for the federal fiscal year that ended in September. That was the fourth-highest total since World War II.
“Something’s going to happen here,” Cote said. “We can either do it thoughtfully and proactively, the way a great nation does. Or we can wait like Greece did.”
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