Falling off the fiscal cliff, even briefly, would be a bad idea

But the psychological damage if lawmakers head home for the holidays without averting the cliff could have lasting effects.

The lack of a year-end deal would unsettle consumers, businesses, and financial markets, says Ellen Zentner, senior U.S. economist at Nomura Securities International. The negativity could feed on itself, leading Americans to stop spending and businesses to stop hiring and investing. Even a temporary expiration of the cuts could lead to a quarter of negative growth in gross domestic product, Zentner says. Her firm already expects GDP growth to slow to a crawl in the first quarter, advancing by a mere 0.5 percent. Because consumer spending accounts for more than two-thirds of GDP, another drop in such spending could push the economy into a contraction.

Nervousness about the cliff has hampered growth in the business sector for several months. Business investment shrank 1.3 percent in the third quarter, the biggest drop since late 2009. The pullback in investment dovetails with a recent Business Roundtable survey that found pessimism of CEOs hitting a three-year high. Analysts found that fears about the fiscal cliff were driving much of the pessimism. Yet even though businesses have turned cautious, a complete Washington stalemate could still blindside Wall Street. “We don’t think the markets have it priced in whatsoever,” Zentner says. And if businesses are pessimistic now, imagine how they’ll feel if Congress plunges from the cliff.