Just Explain It: Why the Fiscal Cliff May Trigger a Recession

Lawmakers in Washington appear to be making little to no progress in avoiding the impending so-called fiscal cliff.  House Speaker John Boehner, R-Ohio, said Friday the negotiations are "almost nowhere." On Thursday Boehner rejected a proposal from the Obama administration saying that the Democrats need to "get serious about real spending cuts."
President Obama's offer continues to call for higher taxes on the wealthy and an extension of the payroll tax cut.   But Republicans say they will not agree to a plan that raises taxes.
As the country continues to head toward the fiscal cliff, this Just Explain It helps to make sense of what it is.
On December 31st, most of us would like to be thinking about a prosperous new year ahead…drinking bubbly and singing Auld Lang Syne with friends.  But there's a chance we could be singing a different tune if President Obama and Congress don't agree on measures to avoid the fiscal cliff.
First, let me explain what the fiscal cliff is.
The fiscal cliff refers to the potentially disastrous situation the U-S faces at the end of this year.  At midnight on December 31st, a number of laws are set to expire.  If the President and the Republicans don't reach an agreement before then, Americans could face broad government spending cuts and tax increases on January 1st.   The combined amount would total over 500 billion dollars. Those 500 billion dollars equal about three to four percent of the nation's entire gross domestic product.  This is what's referred to as the fiscal cliff.
If there isn't a resolution, here are the specifics of what will happen.
Taxes would go up for almost every taxpayer and many businesses. The Bush-era tax cuts, which tax relief for middle and upper-class tax payers, would be a thing of the past.  So would President Obama's payroll tax cut which added about a thousand dollars a year to the average worker's income.
Government spending would be slashed.  That means less money for most military, domestic and federal programs.  $26 billion in emergency unemployment-compensation would be gone. Medicare payments to doctors would be reduced by $11 billion. Federal programs would take the biggest hit.  They stand to lose a total of $65 billion.
If the fiscal cliff isn't avoided, some investors will be hit hard.  Those who receive qualified dividends could see the tax rate on those dividends go from 15% to almost 40% in 2013.
Many business owners believe going over the fiscal cliff will cripple the economy, triggering a deep recession.  They fear demand for their products or services will decrease because consumers will have less money to spend.  It also means that they won't be able to afford new hires or expand their businesses.   Since most Americans would be paying more in taxes, they'd be less inclined to make big purchases, like a home or a new car.
None of this is set in stone, but that's part of the problem.  Markets, businesses and people in general hate uncertainty. The fear of the unknown facing us at the beginning of next year is exactly why so many people are so worked up over the fiscal cliff.
Did you learn something? Do you have a topic you'd like explained?  Give us your feedback in the comments below or on twitter using #justexplainit.

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Retailers report higher December sales

A last-minute surge in spending saved the holiday shopping season.
Major retailers including Costco, Gap and Nordstrom on Thursday reported better-than-expected revenue in December. That comes as a relief for stores, which can make up to 40 percent of their annual revenue in the last two months of the year.
Americans spent cautiously early in the season as the Northeast recovered from Superstorm Sandy. Then they held back because of fears that the U.S. economy would fall off the "fiscal cliff," triggering massive budget cuts and tax increases that would have amounted to less money in their pockets. But shoppers spent more freely in the final shopping days of the year.
Twenty retailers reported that revenue at stores open at least a year — an indicator of a store's health — rose an average of 4.5 percent in December compared with the same month a year ago, according to the International Council of Shopping Centers. That's on the high end of the expected range of 4 percent to 4.5 percent. Only a small group of stores that represent about 13 percent of the $2.4 trillion U.S. retail industry report monthly revenue, but the data offers a snapshot of consumer spending.
"I wouldn't be doing cartwheels that it was a particularly great or strong holiday season, but it could have been worse given the headwinds," said Ken Perkins, president of RetailMetrics, a research firm. "The government and Mother Nature were not as cooperative as retailers would have liked. But it was definitely not as bad as feared."
December's results provide a brighter picture than reports last month that proclaimed that the holiday shopping season was shaping up to be the worst since 2008 when the U.S. was in a deep recession.
To be sure, the season had multiple fits and starts, with healthy spending during certain periods followed by stretches of tepid sales. Overall, revenue for the combined months of November and December rose 3.1 percent, roughly on par with the 3 percent rise that the ICSC had predicted.
Sales were weak at the beginning of November in the wake of Superstorm Sandy and the distraction of the U.S. presidential campaign, followed by a surge later in the month during the four-day Thanksgiving weekend. Spending fell off after that until a rush before and after Christmas when some stores began offering bigger discounts.
Nordstrom, for instance, had a particularly strong December, with revenue at stores open at least a year up 8.6 percent, more than double the 3.4 percent analysts expected. The Seattle-based department store operator said revenue was particularly strong in the last week of the season.
"That last-minute shopping, coupled with post-Christmas bargain hunting and early gift-card redemption, helped propel sales at the end of the month," said Michael P. Niemira, ICSC's chief economist.
Kelly Tenedini, 35, decided to pick up some "filler" gifts for her mom and her sister on the Sunday before Christmas at the Target in the Edgewood Retail District in Atlanta. Tenedini, who spent about $400 during the season, bought a sweater for her mom and gloves for her mother and sister that day.
Tenedini, who works in marketing, said the biggest deal she found was for herself: $50 off a pot and pan set on Target.com.
Manuel Gonzalez, 52, from Manhattan borough of New York City, spent about $150 on the Saturday before Christmas when he went to The Garden State Plaza in Paramus, N.J. He scooped up bargains, including 75 percent off Sketcher sneakers at Macy's.
For the season, he was planning to spend about $400 to $500 for gifts for his three boys, ages 5, 8 and 22 -- the same amount he spent a year ago.
Gonzales, who works at a bank, said he's glad he waited until later in the season to shop: "I am budgeting."
While the last-minute promotions may have drawn shoppers like Tenedini and Gonzalez, they also ate into stores' profits.
For instance, Kohl's said its December revenue at stores open at least a year increased 3.4 percent, beating Wall Street predictions. But the retailer said that the growth came from heavy discounts, and it cut its profit outlook for the current quarter and full year.
"Sales came late in the holiday shopping season and, as a result, were at deeper discounts than planned," said CEO Kevin Mansell. "We are taking the necessary markdowns in the fourth quarter to manage our inventory as we transition into the Spring season.

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GM could face $918 million hit from bankruptcy-related lawsuit

A U.S. bankruptcy judge could soon rule on whether the 2009 government-led restructuring of General Motors Co improperly favored hedge funds, and an adverse ruling could cost the automaker nearly $1 billion.
Judge Robert Gerber must decide whether a "lock-up agreement" in the restructuring sent $367 million to a group of hedge fund noteholders at the expense of other creditors.
A trust representing unsecured creditors has sued to undo the lock-up agreement, arguing that it was a last-minute deal secretly folded into GM's bankruptcy to ensure the hedge funds' support.
After the automaker, or "Old GM," filed for bankruptcy in 2009, its best assets were sold to the new General Motors Co . The remainder of the company was liquidated for the benefit of creditors.
While the hedge funds, which hold notes with about $1 billion in face value, received the $367 million under the lock-up agreement, unsecured creditors received just pennies on the dollar. The hedge funds and other investors in the notes also received a claim against "Old GM" for $2.67 billion.
In its lawsuit, which was filed in U.S. Bankruptcy Court in Manhattan, the creditors' trust alleged that the lock-up agreement was unfair to "Old GM" creditors. The trust said the deal took place after the bankruptcy filing and therefore required Gerber's approval, and it called on Gerber to unwind the deal.
GM and the hedge funds have argued the lock-up agreement was sealed before the bankruptcy and was not subject to Gerber's approval. They have also argued the agreement was not secret because it was disclosed in securities filings.
They also argued that the lock-up agreement cannot be unwound without undoing the entire restructuring.
At a court hearing in July, Gerber said he was "shocked" to learn about the hedge fund deal. "The bottom line is, is that this matter is huge," Gerber said. "There was a lack of disclosure to the court on the matter with the potential to injure 'Old GM' creditors to the extent of hundreds of millions, if not billions of dollars."
Gerber held several days of trial between August and October. The hedge funds and GM have asked Gerber to extend the trial for one more day to call a rebuttal witness, a request to which the judge has not responded publicly.
Although the judge has not said when he will rule on the lock-up agreement, experts say a ruling could come as early as this month.
A GM spokesman and Bruce Zirinsky, a Greenberg Traurig lawyer who represents the main hedge fund defendants, both said they expect to prevail but declined to comment further. A lawyer for the creditor trust, Eric Fisher of Dickstein Shapiro, did not respond to requests for comment.
The defendants are the hedge funds that signed the lock-up agreement, as well as others that invested in the notes along with the hedge funds. While GM is not a defendant, the automaker said in an earnings statement in August that the lawsuit could lead to a possible loss of as much as $918 million.
This is because GM could find itself on the hook for a loan of around $1 billion that was owed by GM Canada to a financing unit based in Nova Scotia that had issued notes to the hedge funds.
According to court papers, the lock-up agreement was negotiated with the involvement of Canada and the United States, which were funding the bankruptcy.
The two governments wanted to keep GM Canada out of that country's potentially complicated insolvency proceedings and agreed to pay the $367 million to the hedge funds to resolve GM Canada's debt to the Nova Scotia entity.
In addition to the payment, "Old GM" agreed not to contest claims against it by the noteholders with a face value of $2.67 billion.
Regardless of the outcome, Gerber said in July he expected his ruling to be appealed.
The case is Motors Liquidation Company GUC Trust v The Liverpool Limited Partnership et al, U.S. Bankruptcy Court, Southern District of New York, No. 12-09802.

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Private sector job gains offer hope for labor market

WASHINGTON (Reuters) - Private-sector employers shrugged off a looming budget crisis and stepped up hiring in December, offering further evidence of underlying strength in the economy as 2012 ended.
While other data on Thursday showed an increase in the number of Americans filing new claims for unemployment benefits, the trend remained consistent with steady job growth.
"The underlying economy has momentum, and the employment data confirms that. The hope and prayer of the market is that our political leaders don't screw it up," said John Brady, managing director at R.J. O'Brien & Associates in Chicago.
Although Congress this week approved a deal to avoid the so-called fiscal cliff, a combination of sharp government spending cuts and higher taxes that would have sucked about $600 billion from the economy, the budget problems are far from resolved.
The ADP National Employment Report showed the private sector added 215,000 jobs last month after increasing payrolls by 148,000 in November. The report is jointly developed with Moody's Analytics.
The job gains came even as companies worried the economy might fall off the fiscal cliff.
However, the ADP data tends to overstate job gains in December because of a year-end accounting quirk.
"While we are encouraged by the better tone in the ADP employment report, we are cautious about reading too much into it, particularly given its tendency to exaggerate the performance of the labor market in December," said Millan Mulraine, a senior economist at TD Securities in New York.
Still, the report added to other data ranging from consumer spending to manufacturing that have suggested the economy was in a much better shape than previously thought.
It was released ahead of the government's more comprehensive employment report on Friday, which is expected to show employers added 150,000 jobs to their payrolls in December, according to a Reuters survey of economists, up from 146,000 in November.
STEADY JOB GAINS
A separate report from the Labor Department showed initial claims for state unemployment benefits increased 10,000 to a seasonally adjusted 372,000 last week. However, claims data for nine states, including California and Virginia, was estimated because of the Christmas and New Year holidays.
The four-week moving average for new claims, a better measure of job market trends, was little changed at 360,000, a sign labor conditions continue to improve at a steady pace.
"The claims data are not always reliable labor market indicators around the holiday season because of issues seasonally adjusting the data, but it is still a somewhat encouraging sign to see the trend in the data remain relatively low," said Daniel Silver, an economist at JPMorgan in New York.
Job gains in the first 11 months of last year averaged about 151,000 per month, not enough to significantly lower unemployment. The jobless rate dropped by 0.2 percentage point to 7.7 percent in November and is expected to have held at that level last month.
Labor market concerns prompted the Federal Reserve to aggressively ease monetary policy, but consensus is diminishing.
Minutes of the U.S. central bank's December 11-12 meeting released on Thursday showed some policymakers thought it would be prudent to slow or stop asset purchases well before the end of this year because of concerns about financial stability.
Stocks on Wall Street ended lower on the prospect of the Fed adopting a less accommodative stance. Prices for U.S. government debt fell, with the yield on the longer-dated 30-year bond touching its highest level since May.
The U.S. dollar rose against a basket of currencies.
The improving labor market tone was also captured by a third report showing planned layoffs at U.S. firms fell in December for the first time in four months, while the overall job-cut total in 2012 was the lowest since 1997.
"The key to job creation is the pace at which companies are willing to hire new workers since it appears they are already retaining existing employees at a high rate," said John Ryding, chief economist at RDQ Economics in New York.
Better job security is helping to support domestic demand. Auto sales rose 9.0 percent last month to a 1.36 million-unit annual rate last month.
Several major retailers reported better-than-expected sales in December. Sales at stores open at least a year rose 4.5 percent, beating analysts' estimates for 3.3 percent growth.

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US job market resilient despite budget fight

The U.S. job market showed resilience in three reports Thursday, suggesting it may be able to withstand a federal budget battle that threatens more economic uncertainty in coming months.
A survey showed private hiring increased last month, while layoffs declined and applications for unemployment benefits stayed near a four-year low. The data led some economists to raise their forecasts for December job growth one day before the government releases its closely watched employment report.
"The job market held firm in December despite the intensifying fiscal cliff negotiations," said Mark Zandi, chief economist at Moody's Analytics. "Businesses even became somewhat more aggressive in their hiring at year end."
The most encouraging sign came from payroll provider ADP. Its monthly employment survey showed businesses added 215,000 jobs last month, the most in 10 months and much higher than November's total of 148,000.
Economists tend to approach the ADP survey with some skepticism because it has diverged sharply at times from the government's job figures. The Labor Department releases its employment report Friday.
But some economists were also hopeful after seeing businesses were less inclined to cut jobs last month.
Outplacement firm Challenger, Gray & Christmas said that the number of announced job cuts fell 43 percent in December from November, and overall planned layoffs in 2012 fell to the lowest level since 1997.
The decline in layoffs coincided with a drop last month in the number of people who applied for unemployment benefits. The four-week average was little changed at 360,000 last week. That's only slightly above the previous week's 359,750, which was the lowest since March 2008.
Most economists expect the Labor Department report will show employers added about 150,000 jobs last month and the unemployment rate stayed at 7.7 percent.
Some economists saw potential for stronger gains after seeing Thursday's data.
Joseph LaVorgna, chief U.S. economist at Deutsche Bank, raised his forecast for job growth in December to 190,000 jobs, up from 150,000.
Credit Suisse increased its forecast to 185,000, up from 165,000.
"Given that we have restraints, the labor market data do appear to be improving," said Dana Saporta, an economist at Credit Suisse.
Still, many economists remained cautious about where the job market is headed. While Congress and the White House reached a deal this week that removed the threat of tax increases to most Americans, they postponed the more difficult decisions on cutting spending. And the government must also increase its $16.4 trillion borrowing limit by late February or risk defaulting on its debt.
Congressional Republicans are pressing for deep spending cuts in return for any increase in the borrowing limit. President Barack Obama has repeatedly said wants the issues kept separate.
The economy has added about 150,000 jobs a month, on average, over the past two years. That's too few to rapidly lower the unemployment rate.
Hiring probably won't rise above the current 150,000 per month trend until after the borrowing limit is resolved, economists say.
A similar fight over raising the borrowing limit in 2011 was only settled at the last hour and nearly brought the nation to the brink of default.
"That's not an environment where you're likely to be taking risks," such as boosting hiring, said Nigel Gault, chief U.S. economist at IHS Global Insight.
Even with modest gains in hiring, the unemployment rate remains high. It fell to 7.7 percent in November from 7.9 percent in October. But that was mostly because many of the unemployed stopped looking for jobs. The government counts people as unemployed only if they are actively searching for work.
The number of people receiving jobless benefits fell to 5.4 million in the week ended Dec. 15, the latest data available. That's down about 70,000 from the previous week. The figure includes about 2.1 million people receiving emergency benefits paid for by the federal government. The White House and Congress agreed earlier this week to extend that program for another year.
There are signs the economy is improving. The once-battered housing market is recovering, which should lead to more construction jobs this year. Companies ordered more long-lasting manufactured goods in November, a sign they are investing more in equipment and software. And Americans spent more in November. Consumer spending drives nearly 70 percent of economic growth.

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50 million Android and iOS devices activated in last week of December alone

The latest numbers from analytics firm Flurry suggest that Android and iOS flourished in the last week of the 2012. The firm previously estimated that roughly 17.4 million Android and iOS devices were activated on Christmas Day, leading to an estimated 1.76 billion mobile application downloads and more than 50 million activations for the full week. The latest numbers represent the highest number of device activations and app downloads of any week in history, an increase from 20 million activations and 1.2 billion downloads during Christmas week in 2011. Flurry estimates that in 2013 the trend of one-billion app downloads per week will become more frequent and by next December, more than 2 billion apps will be downloaded in a single week.

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Apple reportedly considering Waze acquisition to help fix iOS Maps app

Less than a month after rumors of a potential TomTom acquisition swirled, Apple (AAPL) is now reportedly considering a buyout of social navigation startup Waze in an effort to improve its much-maligned Maps application. TechCrunch reported on Wednesday that “there are rumours flying around that Apple is sniffing around Waze with a view to a possible acquisition,” though the source of the rumors is unclear. A similar report was published by Israeli news site NewsGeek.
[More from BGR: ‘iPhone 5S’ to reportedly launch by June with multiple color options and two different display sizes]
Waze, which currently provides some data to Apple for use in its iOS Maps app, utilizes user-submitted data to enhance its free navigation service available for iOS, Android and other platforms. Waze CEO Noam Bardin has been vocal about the quality of Apple’s mapping solution in the past, having said previously that Apple chose some of its mapping partners poorly, resulting in “the lowest, weakest data set.”

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HTC rumored to debut flagship ‘M7′ smartphone at CES

HTC (2498) will reportedly unveil a new flagship smartphone code-named “M7″ at the Consumer Electronics Show next week. The rumor comes to us from XDA-Developers forum member “Football,” who reported accurate information about unreleased HTC devices in the past. The phone is believed to the be the successor to the One X and could be equipped with a 4.7-inch full HD 1920 x 1080-pixel display, a 1.7GHz quad-core Snapdragon processor, a 13-megapixel rear camera, LTE and HSPA+ connectivity, Beats Audio, 2GB of RAM, 32GB of internal memory and a 2,300 mAh battery. The M7 is also said to be HTC’s first smartphone to utilize on-screen navigation keys in place of traditional hardware buttons.
[More from BGR: ‘iPhone 5S’ to reportedly launch by June with multiple color options and two different display sizes]
The problem for HTC in the past has been the company’s ability to market its high-end devices to consumers. Despite class-leading features and hardware, HTC’s smartphone sales have stalled in the past year and the company has continued to lose market share. It will be interesting to see if it can turn things around in 2013.
[More from BGR: Microsoft lashes out at Google’s decision to spurn Windows Phone]
The Consumer Electronics Show is scheduled to take place from January 8th to January 11th in Las Vegas, Nevada.

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Microsoft acquires start-up id8: source

SAN FRANCISCO (Reuters) - Microsoft Corp bought start-up id8 Group R2 Studios Inc as it looks to expand further in technology focused on the home and entertainment, a person familiar with the situation said on Wednesday.
id8 Group R2 Studios was started in 2011 by Silicon Valley entrepreneur and investor Blake Krikorian. It recently launched a Google Android application to allow users to control home heating and lighting systems from smartphones.
Krikorian's Sling Media - which was sold to EchoStar Communications in 2007 - made the "Slingbox" for watching TV on computers.
Krikorian will join Microsoft with a small team, according to the Wall Street Journal, which reported the acquisition earlier on Wednesday. Microsoft also purchased some patents owned by the start-up related to controlling electronic devices, the newspaper added.
Krikorian and a Microsoft spokesman declined to comment.
Krikorian resigned from Amazon.com Inc's board in late December after about a year and a half as a director at the company, the Internet's largest retailer.

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2013′s first hot Kickstarter project: An Android-based gaming ‘console-on-a-stick’

We didn’t have to wait very long to discover what 2013′s first big Kickstarter project would be. Via Ars Technica, we give you the GameStick, an Android-based two-inch long stick that plugs directly into a controller and acts as a highly portable gaming console. The GameStick team says that their goal with the new mini-console was to create “a big screen games console that was so small you could pop it in your pocket… so you can take all your games with you to any TV you like.” As far as titles go, GameStick developers so far have “identified 200 [Android] titles that will be great to play on GameStick” and are also “working with our network of over 250 developers including great studios such as Madfinger, Hutch, Disney and others to bring you the best line-up.” The project is seeking $100,000 by February 1st and has already raised over $31,500 on its first day; in other words, gamers who invest in the GameStick should see a lot of exciting stretch goals announced over the next month. If fully funded, GameStick is slated to launch to the public by this April.

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