U.S. economy could grow faster than expected in 2013, experts say

U.S. economy could grow faster than expected in 2013, experts say

The American economy could finally have a pretty good year next year — assuming Washington does its part.

Economists see a number of sources of underlying strength in the economy, but for the growth to gain traction, they say, political leaders need to avoid the broad tax increases and spending cuts now being debated.

The nascent housing rebound, the natural gas boom, record profit margins, a friendlier credit market for small businesses, along with pent-up demand for autos and other big purchases, could in combination unleash growth and hiring that the economy needs.

“Underneath all the shenanigans in Washington, there’s a lot of strengthening,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

More robust growth next year — perhaps higher than 3 percent later in the year, according to some of the more optimistic forecasts — would certainly be a stark reversal from the current sluggish path.

There is a range of opinion among economists, though, and some warn of continued sluggishness, especially in the beginning of the year.

Estimates for the last quarter of 2012 are hovering around an unusually weak 1 percent annualized rate.

That dismal pace is driven partly by drags from Europe’s recession and China’s slowdown; partly by companies readjusting after potentially overstocking their back-room shelves in the third quarter; and largely by worries about the so-called fiscal cliff of spending cuts and tax increases set for early 2013.

Surveys of consumer and business confidence in recent weeks have plummeted to recession-era lows. With such uncertainty, businesses have also recently curtailed spending on capital investments like computers, delivery trucks and other equipment, apparently in anticipation of higher tax rates and the destructive side effects of government cutbacks. Given that capital expenditures have been weak recently, some economists believe businesses will start spending more if Congress ends or at least delays the risk of severe fiscal tightening.

“You would think there must be for most businesses a list of projects they’d like to do which they’ve just been pushing a little bit into the future because they haven’t been able to justify taking the risk because they don’t know what’s around the corner,” said Nigel Gault, chief United States economist for IHS Global Insight. “When they know more about the future, and what tax rates they’ll be paying, they will be able to dust off those plans and finally execute them.”

Improving access to credit helps these capital expenditures become not only more attractive, but also more accessible. Commercial and industrial loans have been rising in recent months, according to the Federal Reserve. The National Federation of Independent Business has also reported that the share of small business owners who say their credit needs are not being met has been falling.

Additionally, corporate profits reached a high, even adjusting for inflation, in the third quarter. Companies have amassed a lot of cash that they can use to buy equipment or hire people if they feel secure enough about the recovery.

Consumers, on the other hand, are still not exactly cash-rich, particularly since their disposable income has been flat to falling in recent months. But in the last few years they have deleveraged greatly — either by paying down debt or having it written off through default — and, more important, they are feeling a little wealthier because the housing market appears to have bottomed out. The country has finally worked its way through the excess housing inventory from the bubble years, and now housing prices and housing construction are rising.

Household formation is picking up: young people are finally moving into their own homes, as are other Americans who had lived with family or friends.

“We’re slowly but steadily improving, with more job opportunities in particular for younger households,” said Mark Zandi, chief economist at Moody’s Analytics. “They can only live with their parents for so long. There are powerful centrifugal forces in those households, on both sides. As soon as they have a chance to get out, many will take it.”

Demographic data suggests that there should be about a million more households headed by younger Americans today than there actually are. That bodes well for continued formation of households next year, and new household formation is typically accompanied by other spending like furniture and kitchenware. Under normal circumstances, each new household adds about $145,000 to output that year as the spending ripples through the economy, Mr. Zandi says.

As is the case with businesses, economists see consumers unleashing some of their pent-up demand for cars. The average age of all vehicles in operation in America is at a record high of 11.2 years, according to the research firm R. L. Polk, which tracks vehicle sales and registrations. Vehicle sales have already been posting large gains this year.

The major caveat to all these relatively upbeat indicators, of course, is that Congress might override all this strength with deep austerity measures.

Even without all of the federal tax increases and spending cuts scheduled for 2013, the government sector will slow growth because state and local governments are still shrinking, said Michael Feroli, chief United States economist for JPMorgan Chase. The sharp fiscal tightening at the federal level under current law would not only drag on growth but throw the entire economy back into recession, according to numerous private and government forecasters.

The nonpartisan Congressional Budget Office has estimated that the entirety of the so-called fiscal cliff would shave about three percentage points off gross domestic product growth next year.

A more modest tightening along the lines of what President Obama wants — which would include extending most existing tax rates and spending programs — would still substantially reduce growth, analysts say. Charles Dumas, the chairman of Lombard Street Research, forecasts about a two percentage point subtraction from output growth next year under a situation where most of the Bush tax cuts are kept, the payroll tax holiday is phased out and most of the scheduled spending cuts are eliminated.

“The full drag posed by the cliff is sufficient to erase roughly two and a half years’ worth of economic gains,” said Joseph A. LaVorgna, chief United States economist at Deutsche Bank.

Source: The New York Times