Wall Street Journal (12/26/12) Sudeep Reddy

The current deadlock in budget negotiations is unsettling consumers and businesses, increasing the risks that economic growth will be hurt next year no matter what Congress does in the coming days. Lawmakers returning to town this week will see whether they can agree on a plan to avoid the combined $500 billion in tax increases and spending cuts set to begin next week. Aides in both parties say they expect a potential solution to start taking shape by the end of the week, but with so little time, hopes are dimming for anything other than a partial agreement, which would prolong the uncertainty and leave in place some tax or spending measures that act as a serious drag on the weak recovery.

Potential scenarios include a partial agreement that defers several key decisions; a January agreement that could avoid unsettling investors and consumers by signaling their intentions but giving the economy a hit from the expiration of the payroll-tax cut and some other tax breaks; or no agreement soon. If the battle continues beyond early January, the odds of a new recession rise dramatically. Each scenario involves prolonged uncertainty. Government agencies could start cutting back, hurting employees and suppliers. Many other employers likely would slow hiring or cut jobs.