Unless the White House and Congress reach an agreement in the next two weeks, the tax increases and expenditure cuts mandated by the “fiscal cliff” agreement will undercut US economic growth in 2013. The combination of fiscal effects and an uncertain environment for business investment might even tip the nation back into recession.
A new recession would have at least some negative consequences for virtually every US non-financial corporate sector, and certain industries would bear the brunt of this risk, while defaults would inevitably rise among corporate issuers at the low end of the rating spectrum.
While the effect of higher taxes and government spending cuts is difficult to forecast, certain US industries would bear the brunt of the risk. The Automobile, Gaming, and Lodging and Cruise sectors could suffer if consumers pull back their spending, while the already struggling newspaper industry would come under increased pressure. Paper producers would also come under far more stress.
A contraction in the US economy would also lead oil prices to drop below Moody’s current assumptions for 2013, though oil prices would still probably remain strong by historical standards. The effect on upstream segments of the oil and gas industry would depend on how quickly companies adjust their cost structures, while the Refining and Marketing sector could face additional margin pressure amid an ebb in demand from the US and China.
Some sectors would avoid the worst effects of the fiscal cliff, despite ostensible risks, Moody’s says. Airline companies can cut capacity if bookings moderate, while the Building Materials sector has at least a low level of guaranteed government spending in place through the end of 2014.
And the rating agency assumes that the Aerospace and Defense, For-Profit Hospitals and Medical Products and Device sectors, which all at least partly depend on government spending, will see sharp cuts in that spending regardless of the outcome of negotiations in Washington.