BOSTON (Reuters) - Corporate America is raising the volume of its plea that the U.S. government avert a year-end “fiscal cliff” that could send the nation back into recession, but chief executives aren’t pushing the panic button just yet.
With a heated election season in the rear-view mirror, executives are calling on the White House and congressional leaders to head off a self-imposed deadline that could bring $600 billion in spending cuts and higher taxes early in 2013 if they are unable to reach a deal on cutting the federal budget deficit.
The Business Roundtable on Tuesday kicked off a print, radio and online ad campaign on which it plans to spend hundreds of thousands of dollars featuring the chiefs of Honeywell International Inc (HON.N), Xerox Corp (XRX.N) and United Parcel Service Inc (UPS.N) calling on lawmakers to resolve the issue.
In an opinion piece published on Tuesday evening on the Wall Street Journal’s website, Goldman Sachs Chief Executive Officer Lloyd Blankfein urged the business community and the Obama administration to compromise and reconcile so as not to derail the fragile recovery.
One of the more dramatic warnings of the consequences of allowing the U.S. economy to go over the fiscal cliff came from Honeywell CEO David Cote.
“If the last debt ceiling discussion was playing with fire, this time they’re playing with nitroglycerin,” Cote said in an interview. “If they go off the cliff, I think it would spark a recession that’s a lot bigger than economists think. Some think it would just be a small fire. I think it could turn into a conflagration.”
The nonpartisan Congressional Budget Office (CBO) estimates that the U.S. economy would contract 0.5 percent in 2013 if the government fails to stop the budget cuts and tax increases - far below the 2 percent growth economists currently forecast.
A failure in Washington to solve the crisis by the year’s end could prompt major companies to curtail investment plans, said Duncan Niederauer, CEO of NYSE Euronext NYX.N, operator of the New York Stock Exchange.
“We simply won’t be investing in the United States. We will be investing elsewhere where we have more certainty of the outcome,” Niederauer said in an interview.
About a dozen top U.S. CEOs, including General Electric Co’s (GE.N) Jeff Immelt, Aetna Inc’s AET.N Mark Bertolini, American Express Co’s (AXP.N) Ken Chenault and Dow Chemical Co’s (DOW.N) Andrew Liveris are scheduled to meet with President Barack Obama on Wednesday to discuss the issue.
The four are members of “Fix the Debt,” an ad-hoc lobbying organization that this week launched an advertising campaign that advocates long-term debt reduction.
Bank of America Corp (BAC.N) CEO Brian Moynihan said on Tuesday that worries about the cliff have companies holding off on spending.
“That uncertainty continues to hold back the recovery,” Moynihan said, speaking at an investor conference in New York.
Sandy Cutler, CEO of manufacturer Eaton Corp (ETN.N), shared his concern.
“Until we solve the fiscal issues (in the United States and Europe), you’re not going to get back to normal GDP growth,” Cutler told investors on Tuesday.
CEOs are not alone in this worry. The CBO report warned that failure to reach a deal could push the U.S. unemployment rate up to 9.1 percent, the highest since July 1991. It is currently 7.9 percent.
Obama and the Republican leadership of the House of Representatives have signaled a more conciliatory tone since last week’s election, when Obama soundly defeated Republican challenger Mitt Romney, whose party retained a majority in the House.
Wilbur Ross, an investor known for taking stakes in distressed companies, is bracing for higher tax rates in 2013.
“We, like many people, have been trying to utilize gains this year. It does seem that the probability is that rates will go up,” Ross said in an interview with Reuters Insider. “We don’t have a “for sale” sign on anything. But we are mindful that there is a benefit to concluding things this year rather than next.
Concerns about the cliff have not prompted customers to cancel orders, though they have added to an overall level of uneasiness that has companies wary of making large capital purchases or hiring significant numbers of new workers.
“We haven’t seen the panicking, like, ‘I’m not going to order something because of the fiscal cliff,’” said Steve Shawley, chief financial officer of heating and cooling systems maker Ingersoll Rand Plc (IR.N). “Customers are being very judicious with their orders.”
Likewise, JPMorgan Chase & Co (JPM.N) CEO Jamie Dimon last month told investors he did not expect the negotiations to hurt lending in the fourth quarter.
“The fiscal cliff isn’t going to change us,” Dimon said, referring to JPMorgan’s commercial bank, which loans money to businesses. The bank’s investment banking side could be more vulnerable if the debate makes investors jittery, he allowed.
WEAPONS, MEDICINES IN THE CROSS-HAIRS
The defense and healthcare sectors are the most vulnerable to the fiscal cliff, as they face the threat of sequestration — automatic, across-the-board cuts to their funding.
Makers of weapons systems note that they have long been preparing for declining sales as the United States winds down two long wars in Iraq and Afghanistan. The industry has already shed tens of thousands of jobs and closed facilities.
Lockheed Martin Corp’s (LMT.N) new president and chief operating officer, Marillyn Hewson, told analysts on Monday her company had been preparing for tighter defense budgets for years, even before the sequestration deal.
“We aren’t going to see a major change,” said Hewson. “We’ve been very proactive as a leadership team in taking actions in recent years to address our cost structure, to look at how we can make our product more affordable.”
Automatic cuts to the federal budget could reduce federal health spending by $21.5 billion in 2013, potentially affecting everything from Medicare to the Food and Drug Administration, according to an analysis by PwC’s Health Research Institute.
Vincent Forlenza, the CEO of Becton Dickinson & Co (BDX.N), said the labs he supplies have held off on buying new instruments because of the threat of spending cuts.
“If we don’t get to a deal we will have another year of paralysis and putting off research,” Forlenza said. “The impact of uncertainty on the (National Institutes of Health) budget is causing our research customers to put off research.”
(The story corrects spelling of company name in penultimate paragraph to “Becton Dickinson” instead of “Beckton Dickinson”)
Additional reporting by John McCrank, Nick Zieminski, Caroline Humer, Jed Horowitz, Sharon Begley and Daniel Wilchins in New York, Rick Rothacker in Charlotte, North Carolina, Nichola Groom in Los Angeles, Andrea Shalal-Esa in Washington, Debra Sherman in Chicago and Anna Driver in Houston; Editing by Patricia Kranz and Steve Orlofsky and Carol Bishopric