graphThe Congressional stalemate over extending the Bush tax cuts and spending decisions are edging the country to the brink of a new recession, says a report from Merrill Lynch Wealth Management. According to its After the Election report, the automatic jump in taxes for high-earners and federal spending cuts may be too much for the Federal Reserve to handle.

“If no compromise is reached by the end of this year, the bipartisan Committee for a Responsible Federal Budget predicts that the nation could face a second recession from the combined spending cuts and tax increases,” the report said. “Federal Reserve Chairman Ben Bernanke warned Congress in September that the tools at the central bank’s disposal may not be ‘strong enough to offset’ the effects of such a combination.”

However, the report also reflects some optimism that lawmakers will reach a compromise before the early-2013 deadline:

“We think that odds of a kick-it-down-the-road compromise are now rising,” said Lisa Shalett, Chief Investment Officer at Merrill Lynch. “There is no political party that wants to drive the economy into a recession.”

The report states that the healthcare sector companies, especially those with Medicaid-managed care plans and pharmaceutical companies, should experience growth during Obama’s second term, but defense companies will likely undergo cuts.

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