Top Economic Risks For The Fourth Quarter

The month that just ended was billed as the “September to Remember.” Significant events in a number of countries were on the docket; the outcomes were expected to have important influences on the global economy.

Unfortunately, we entered October without much clarity on any of the critical fronts. A series of tail risks remains on the horizon. The following is a discussion of the most important focal points as we settle into the fourth quarter.

The U.S. fiscal situation is as muddied as ever. Congress did pass a continuing spending resolution on September 30 that funds government through early December. That defers the prospect of a government shutdown, but little else has been resolved.

The Democratic caucus is deeply divided over how aggressive to be with long-term fiscal plans. A spending outline can pass with a bare minimum of votes through the reconciliation process, but the majority is working with a razor thin margin. To placate both centrists and progressives, the price tag of the legislation is falling, but the path to passage is still rocky. The fate of the $1.2 trillion infrastructure bill, which has bipartisan support, has been caught in the political maelstrom.

As always, there is plenty of fuzzy math surrounding the budget proposal. Proponents have offered very generous assumptions for the incremental growth and tax revenue that will be generated by various initiatives. The Congressional Budget Office (CBO) and the Committee for a Responsible Federal Budget have cast doubt over White House calculations. The situation is very similar to the one surrounding the 2017 tax cuts, which were also passed through reconciliation.

The “scoring” of the expenditures will determine the size of potential tax increases that may be included in the bill. For now, we are enduring a great degree of uncertainty around the trajectories of spending and taxes, which is not helpful to economic activity.