Economic Outlook 2013: Looking Up, But Keep a Look Out
By Jim Glassman
After nearly four years of slow recovery, high federal deficits and payroll taxes climbing, predictions of a better year to come are probably difficult to swallow. But, truth be told, faster economic growth may very well lie in store, given the strength of the underlying economy. Not a believer? Here's the evidence behind an optimistic outlook for 2013:
- The private economy has a fair amount of momentum and that has been masked by the unwinding of fiscal stimulus that was put in place back in 2009. For example, although the overall economy has been growing about 2 percent annually since the recovery began, real GDP excluding the activities of the public sector has been expanding faster than 3% annualized, significantly better than the overall growth of the economy. In other words, the underlying economy has been doing better than is generally recognized.
- U.S. exports have become very competitive and we're quickly becoming a desired base for international businesses.
- Technological innovation has opened vast new sources of domestic energy, forcing changes in the way we think about energy and promoting new economic activity in many different industries.
- With Europe's crisis easing, its stalled economies—an important U.S. partner—are expected to fare better in 2013.
While this optimistic outlook can either be challenged or supported by unexpected developments, usually such developments are, well, unexpected. Such as the Greek crisis that many experts said would conclude with Greece being expelled from the European Union and the demise of the currency, or Superstorm Sandy, or the turmoil in the Middle East. While random events like these could impact the coming year, they likely won't disrupt overall projections.
Here are a few major things to watch for:
- Social Security payroll taxes that will be rising by about $125 billion in 2013 as last year's "gift" expired in December. Keep an eye on the consumer to see if that headwind is offset by the ongoing cyclical recovery in jobs. It would take about 2.5 million new hires at the median family income to replace the income lost from the jump in payroll taxes. Fingers crossed.
- The battle over federal spending and the debt ceiling, coming to a legislature near you in March. A good outcome would be an agreement that focuses more on the long-term imbalance in Social Security, Medicare and Medicaid than it does on the current level of government spending that is inflated by recession-fighting programs.
- Trends in unemployment and inflation, which will provide hints on when the Fed might end its two large-scale asset purchase programs. Right now the Fed aims to wind down this activity later this year. It's also worth noting that there isn't likely to be much this year that would force the Fed to begin to push up its interest rates.
- Japan's public policy. Japan is losing patience with its anemic performance and appears to be ramping up policy support. This implies the currency could further weaken and the market is onto this. Japan's economy would likely get a lot more help if its currency reverted back to 100 yen versus the dollar.
- Signs of European growth. The crisis was triggered in large part by a fear that ballooning budget deficits, even if they were largely the result of recession (cyclical deficits), would write the obituary for the grand European monetary experiment. A growth revival would begin to shrink those deficits.
- Watch Iran, but watch for what? Iran needs revenues just as badly as the rest of the world needs Iran's oil.
- Corporate profit margins. They're through the roof and Wall Street isn't giving companies credit for that. If margins remain in record setting territory, that will be yet another reason for investors to favor stocks.
- The debates in Washington. A change in the conversation that centered on healthcare reform would not only be a breath of fresh air, but also a sign that legislators are recognizing the source of the projected rise in the structural deficit.
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