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Investing Specialists

Fiscal Cliff Worries Disguise Strong Economic Data

Given the increasing and undeniable strength in the economy, we need not worry if some tax increases and spending cuts are implemented.

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The economic data this week was surprisingly strong across a very broad swath of categories. Real estate data, consumption, income, and even durable goods all performed better than expectations. Nevertheless, a bounceback effect from Hurricane Sandy was evident and may have inflated some of the statistics. Year-over-year data, averaged, suggest the economy is still stumbling along at a rate of about 2%, with no real signs of breaking out in either direction. That said, both businesses and consumers didn't seem terribly worried about the fiscal cliff, with both groups showing renewed vigor in the first months of the fourth quarter of 2012.

The fiscal cliff/budget talks hit another stalemate as the discussion seemed to move from just tax rates to a discussion about what spending cuts might be made in return for tax increases. As I have said many times, both taxes and expenditures are out of line with relatively stable long-term averages, so some adjustment on both counts seems to be necessary.

Robert Johnson, CFA does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.