WASHINGTON (AP) — Housing is rebounding. Families are
shrinking debts. Europe has avoided a financial crackup. And the fiscal
cliff deal has removed the most urgent threat to the U.S. economy.
So why don't economists foresee stronger growth and hiring in 2013?
Part of the answer is what
Congress' agreement did (raise
Social Security taxes for most of us). And part is what it didn't do (prevent the likelihood of more growth-killing political standoffs).
By delaying painful decisions on spending cuts, the deal assures more
confrontation and uncertainty, especially because Congress must reach
agreement later this winter to raise the government's debt limit. Many
businesses are likely to remain wary of expanding or hiring in the
meantime.
One hopeful consensus: If all the budgetary uncertainty can be
resolved within the next few months, economists expect growth to pick up
in the second half of 2013.
"We are in a better place than we were a couple of days ago," Chad
Moutray, chief economist for the National Association of Manufacturers,
said a day after Congress sent President Barack Obama legislation to
avoid sharp income tax increases and government spending cuts. But "we
really haven't dealt with the debt ceiling or tax reform or entitlement
spending."
Five full years after the Great Recession began, the U.S. economy is
still struggling to accelerate. Many economists think it will grow a
meager 2 percent or less this year, down from 2.2 percent in 2012. The
unemployment rate remains a high 7.7 percent. Few expect it to drop much
this year.
Yet in some ways, the
economy
has been building strength. Corporations have cut costs and have
amassed a near-record $1.7 trillion in cash. Home sales and prices have
been rising consistently, along with construction. Hiring gains have
been modest but steady. Auto sales in 2012 were the best in five years.
The just-ended holiday shopping season was decent.
Bernard Baumohl, chief global economist for the Economic Outlook
Group, thinks the lack of finality in the budget fight is slowing an
otherwise fundamentally sound
economy.
"What a shame," Baumohl said in a research note Wednesday. "Companies
are eager to ramp up capital investments and boost hiring. Households
are prepared to unleash five years of pent-up demand."
The economy might be growing at a 3 percent annual rate if not for
the threat of sudden and severe spending cuts and tax increases, along
with the haziness surrounding the budget standoff, says Ethan Harris,
co-director of global economics at Bank of America Merrill Lynch.
Still, Congress' deal delivered a walloping tax hike for most workers: the end of a two-year
Social Security tax
cut. The tax is rising back up to 6.2 percent from 4.2 percent. The
increase will cost someone making $50,000 about $1,000 a year and a
household with two high-paid workers up to $4,500.
Mark Zandi, chief economist at Moody's Analytics, calculates that the higher
Social Security
tax will slow growth by 0.6 percentage point in 2013. The other tax
increases — including higher taxes on household incomes above $450,000 a
year — will slice just 0.15 percentage point from growth, Zandi says.
Congress' deal also postpones decisions on spending cuts for military
and domestic programs, including Medicare and Social Security. In doing
so, it sets up a much bigger showdown over raising the government's
borrowing limit. Republicans will likely demand deep spending cuts as
the price of raising the debt limit. A similar standoff in 2011 brought
the government to the brink of default and led Standard & Poor's to
yank its top AAA rating on long-term U.S. debt.
Here's how key parts of the economy are shaping up for 2013:
— JOBS
With further fights looming over taxes and spending, many companies
aren't likely to step up hiring. Congress and the White House will
likely start battling over raising the $16.4 trillion debt limit in
February.
Many economists expect employers to add an average of 150,000 to
175,000 jobs a month in 2013, about the same pace as in 2011 and 2012.
That level is too weak to quickly reduce unemployment.
The roughly 2 million jobs Zandi estimates employers will add this
year would be slightly more than the 1.8 million likely added in 2012.
Zandi thinks employers would add an additional 600,000 jobs this year if
not for the measures agreed to in the fiscal cliff deal.
Federal Reserve policymakers have forecast that the unemployment rate
will fall to 7.4 percent, at best, by year's end. Economists regard a
"normal" rate as 6 percent or less.
— CONSUMER SPENDING
Consumer confidence fell in December as Americans began to fear the
higher taxes threatened by the fiscal cliff. Confidence had reached a
five-year high in November, fueled by slowly declining unemployment and a
steady housing rebound. Consumer spending is the driving force of the
economy.
But the deal to avoid the cliff won't necessarily ignite a burst of
spending. Taxes will still rise for nearly 80 percent of working
Americans because of the higher Social Security tax rate.
Since the recession officially ended in June 2009, pay has barely
kept up with inflation. The Social Security tax increase will cut
paychecks further. And with the job market likely to remain tight, few
companies have much incentive to hand out raises.
Thanks to record-low interest rates, consumers have whittled their
debts to about 113 percent of their after-tax income. That's the lowest
share since mid-2003, according to Haver Analytics. And the delinquency
rate for users of bank credit cards is at an 18-year low, the American
Bankers Association reported Thursday.
Yet that hardly means people are ready to reverse course and ramp up
credit-card purchases. Most new spending would have to come from higher
incomes, says Ellen Zentner, senior
economist at Nomura Securities.
"We don't see the mindset of, 'Let's run up the credit card again,'" she says.
— HOUSING
Economists are nearly unanimous about one thing: The housing market will keep improving.
That's partly because of a fact that's caught many by surprise: Five
years after the housing bust left a glut of homes in many areas, the
nation doesn't have enough houses. Only 149,000 new homes were for sale
at the end of November, the government has reported. That's just above
the 143,000 in August, the lowest total on records dating to 1963. And
the supply of previously occupied homes for sale is at an 11-year low.
"We need to start building again," says Patrick Newport, an economist at IHS Global Insight.
Sales of new homes in November reached their highest annual pace in
2½ years. They were 15 percent higher than a year earlier. And October
marked a fifth straight month of year-over-year price increases in the
20 major cities covered by the Standard & Poor's/Case-Shiller
national home price index.
Potential homebuyers "are more likely to buy, and banks are more
likely to lend" when prices are rising, says James O'Sullivan, chief
U.S. economist at High Frequency Economics. "It feeds on itself."
Higher prices are also encouraging builders to begin work on more
homes. They were on track last year to start construction of the most
homes in four years.
Ultra-low mortgage rates have helped spur demand. The average rate on
the U.S. 30-year fixed mortgage is 3.35 percent, barely above the 3.31
percent reached in November, the lowest on records dating to 1971.
Housing tends to have an outside impact on the economy. A housing
recovery boosts construction jobs and encourages more spending on
furniture and appliances. And higher home prices make people feel
wealthier, which can also lead to more spending.
"When you have a housing recovery, it's nearly impossible for the U.S. economy to slip into recession," Zentner says.
— MANUFACTURING
Factories appear to be recovering slowly from a slump last fall. The
Institute for Supply Management's index of manufacturing activity rose
last month from November. And a measure of employment suggested that
manufacturers stepped up hiring in December. Factories had cut jobs in
three of the four months through November, according to government data.
Another encouraging sign: Americans are expected to buy more cars
this year. That would help boost manufacturing output. Auto sales will
likely rise nearly 7 percent in 2013 over last year to 15.3 million,
according to the Polk research firm. Sales likely reached 14.5 million
last year, the best since 2007. In 2009, sales were just 10.4 million,
the fewest in more than 30 years.
And if
Congress
can raise the federal borrowing limit without a fight that damages
confidence, companies might boost spending on computers, industrial
machinery and other equipment in the second half of 2013, economists
say. That would help keep factories busy.