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Election, Fiscal Uncertainty Dampen Employer Confidence

Posted on November 5, 2012

Uncertainty surrounding tomorrow’s presidential election and the impending January 1 “fiscal cliff” pushed business confidence down slightly in Massachusetts during October.

BCI.October.2012The Associated Industries of Massachusetts Business Confidence Index edged off two-tenths of a point to 51.1 last month as employers grew bearish about the national economic outlook. The index showed a 5.6-point drop in employer confidence about the national economy.

“The political polls have shown a closely divided national electorate, perhaps increasing concerns among our survey sample of deadlock in Congress just as Congressional action becomes most urgent,” said Raymond G. Torto, Global Chief Economist at CB Richard Ellis Group, Inc. and Chair of AIM’s Board of Economic Advisors (BEA).

Fred Breimyer, Regional Economist for the Federal Deposit Insurance Corporation and a BEA member, called the 39.4 confidence reading for the national economy “a very low number for an economy which is still growing, albeit slowly.”

“It is the lowest reading of 2012; only 6 percent of survey respondents called national conditions “good,’ while 50 percent rated them “bad’, ” Breimyer said.

The Massachusetts Index of conditions within the Commonwealth was off 1.5 to 48.6, continuing to run ahead of its national counterpart, despite the fact that the state’s growth rate appears to have decelerated and fallen slightly below the national pace.

Uncertainty surrounding the fiscal cliff – the simultaneous expiration of tax breaks, introduction of tax increases and spending cuts at the end of 2012 if Congress fails to enact long-term deficit reduction – has cast a pall over business spending for much of the year. Nonresidential fixed investment fell 1.3 percent during the third quarter, and more than 40 percent of companies surveyed by Morgan Stanley this summer cited the fiscal cliff as a major reason for spending restraint.

The AIM Index, which has appeared since July 1991, is calculated on a 100-point scale, with 50 as neutral; a reading above 50 is positive, while below 50 is negative. The Index reached its historic high of 68.5 on two occasions in 1997-98, and its all-time low of 33.3 in February 2009.

Employers remain far more positive about the prospects of their own companies than about the ability of government to address its fiscal problems. All three company-related elements of the Business Confidence Index gained in October: the broad Company Index rose 2.1 points to 55.9, the Sales Index added 1.8 to 54.4, and the Employment Index gained 3.4 to 53.7.

Have employers found the political campaign useful for defining the most important issues and moving us toward effective responses? Fifteen percent have found the discussion “very useful” and 43 percent “somewhat useful,” but 37 percent replied “useless” and 5 percent “worse than useless.”

“Of course the election itself is uppermost in the public mind, but to some extent Massachusetts employers seem to be most concerned with what Congress will do between Election Day and Inauguration Day to head off a looming fiscal crisis,” commented Richard C. Lord, President and CEO of AIM.

“Right now, they don’t know what tax rates will be in two months, which makes planning difficult; and last year’s political deadlock which brought us to this situation was not a confidence-builder, to say the least. And while a temporary fix may be necessary, it will not be sufficient ” we need to see constructive agreement on a long-term solution, soon.”