Severe fiscal tightening in the U.S. will lead to no growth or a contraction in the first two quarters of 2013 and will push unemployment over the 8 percent level, according to Lombard Street Research.
The knock-on effect will mean pain for the business sector, with corporate profits falling after a hit to consumer spending power, the firm said.
“Our view that unemployment could rise above 8 percent and that profits will be squeezed reflects a forecast of nil to negative 2013 (first quarter) growth, and further stagnation in (the second quarter),” a Lombard Street report released on Friday said.
The view contrasts sharply with that of other analysts who are considerably more bullish on the U.S. economy.
Keith McCullough, CEO of Hedgeye Risk Management told CNBC last week that he thinks employment could actually improve below 7 percent by the fourth quarter, adding that from a housing and employment perspective U.S growth is “pretty solid”.
Lombard Street does not agree.
At the start of the year, the payroll tax that funds Social Security was raised two percentage points to its 2010 level of 6.2 percent. This was the largest component of tax increases approved by Congress in the resolution to the “fiscal cliff”.
Retail sales rose 0.1 percent in January, data released by the Commerce Department showed on Wednesday. These two events together should set alarms bells ringing as tax increases suggest a slowdown in the pace of consumer spending, Lombard Street said.
“Retail sales data encouraged the idea that the payroll tax hike from 4.2 percent to 6.2 percent, worth 1 percent of personal disposable incomes, would pass off with little impact. But the effect of the payroll tax was only partly in January,” it said, indicating that only a modest impact would have been expected for January.