Economy Downshifts In Advance of ''Fiscal Cliff''

Caterpillar confirmed on August 3 that 167 temporary and part-time workers in Indiana will be laid off in September to adjust for diminished demand. Businesses are increasingly holding onto capital as a precaution against uncertainty in government tax and spending policy that could change before year's end.

Federal tax hikes and spending cuts scheduled for automatic implementation at the end of the year ?EUR??,,????'??? the so-called ''fiscal cliff'' ?EUR??,,????'??? are leading wary business owners to hold onto their capital as a precaution against further economic instability.

But the hedge against tomorrow seems to be slowing things down today.

A July survey by Morgan Stanley found that more than 40 percent of companies have reined in spending due to the increasing chance that the fiscal cliff will go into effect. The lack of activity is starting to show, in the form of slower economic growth and a less-positive outlook for the rest of the year.

A Commerce Department report released August 2 stated that factory orders unexpectedly fell 0.5 percent in June from the previous month. Caterpillar announced plans to lay off 167 part-time and temporary workers from its Lafayette, Ind., plant starting in September, to adjust to diminished demand.

If Congress does not approve a deal to avoid the scheduled budget reductions, government spending will decline by over $100 billion next year; if the current tax provisions are not maintained for all income levels, taxes in 2013 will increase by $399 billion. Analysts say that such a jolt to the economy, given the weakness of the current recovery, could send America back into recession.

Leaders in Congress agreed to a deal before the August recess that will keep the government operating at current funding levels through March 2013, a major budget issue that avoids a potential government shutdown. Both houses are expected to vote on the deal when they reconvene in September. If the continuation passes without difficulty, Congress may have time to agree on measures to alleviate the looming problems, but finding common ground in an election year could be especially difficult.