The Fiscal Cliff: What It Is and What it Means for the Fashion Industry

Over the past few weeks, you’ve probably heard the term 'fiscal cliff' being thrown around a lot. We all know it's something to be worried about--but why? What does it even mean? No really, what does it even mean? To fashion in particular? I asked some people whose job it is to know these things.
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Over the past few weeks, you’ve probably heard the term 'fiscal cliff' being thrown around a lot. We all know it's something to be worried about--but why? What does it even mean? No really, what does it even mean? To fashion in particular? I asked some people whose job it is to know these things.
Photo: iStock

Photo: iStock

Over the past few weeks, you’ve probably heard the term 'fiscal cliff' being thrown around a lot. We all know it's something to be worried about--but why? What does it even mean? No really, what does it even mean? To fashion in particular?

I asked some people whose job it is to know these things.

So, what exactly IS the fiscal cliff? Fiscal cliff, a term coined by Federal Reserve chairman Ben Bernanke, basically means that right now, we're Wile E. Coyote chasing the Road Runner, and if the government doesn't supply a safety net we might just fall into deep financial shit in 2013. We're about to experience the biggest tax increase in history. And the budgets of a ton of government programs are about to be cut. If the people we voted for don't do something about that, an already sluggish US economy could slow even further, potentially resulting in another recession.

The good news? President Obama and Congress can keep us from falling off the cliff by cutting a deal to raise the debt ceiling. However, "if there's no fiscal cliff deal in Washington, every American will see an increase in their income taxes, as well as a reversion to the normal level of payroll taxes being taken out of their paychecks," says Joe Weisenthal, deputy editor at Business Insider. "That being said, there's almost certainly going to be a deal this year or early next year, as nobody wants to be responsible for everyone's taxes rising. Furthermore, if it looks like a deal is going to happen, the IRS can prevent tax withholdings from rising, even if there's no deal right away. From a macro-economic perspective, higher taxes and lower spending is bad for the economy. Realistically, it probably won't be that bad."

But if we do indeed fall off the cliff, how will retail be affected, and in turn, the fashion industry?

Photo: iStock

Photo: iStock

But if we do indeed fall off the cliff, how will retail be affected, and in turn, the fashion industry? The worst case scenario: A decrease in spending means a decrease in store sales, which means a decrease in wholesale orders, which means a decrease in cash flow for designers, which means we could end up right where we were in 2008/2009. Meaning, a ton of discounted clothes, a ton of brands going out of business, a ton of advertising budgets cut, resulting in the loss of a ton of media jobs. Pretty dreadful.

Hopefully it won't come to that. (What can I say, I'm really excited about my new job and don't want it to go away.)

"I don’t think fiscal cliff will cause that era of depression once more in retail," says Brian Sozzi, a former retail analyst who is now the chief equities analyst at NBG Productions. "But, in terms of what went down with retail inventories, styles, markdowns, cautious tones by executives it’s a good benchmark to use when pondering the first half of 2013."

Sozzi also believes it'll affect the actual fashion going down the runways in February. "If all you know what breaks loose (pressured profits, focus on lean inventory levels, product chasing) rest assured New York Fashion Week will be showcasing more somber colors and basic-type looks (trendier stuff will again be a turn off to the consumer, they will be trying to get the most bang for their buck)."

So there's that. I feel a little bit better now.

Follow me on Twitter: @lapresmidi.