Slower Growth, Stubborn Unemployment in 2013
For all of 2013, the economy will be hard pressed to accomplish the 2% growth registered this year, and unemployment only will continue falling if more adults opt out of the labor market or settle for part-time work.
This forecast depends on a fiscal cliff agreement that imposes only moderately higher taxes and at least some veiled attempt to curb spending.
On spending cuts, this economist is from Missouri - a state that will be among the hardest hit by the defense cuts resulting from the "fiscal cliff." President Obama and allies in Congress simply won't accept that entitlement spending is out of control. Such cognitive dissonance colors long-term prospects, even as revealed by forecasts coming from Democratic economists.
Should the president succeed in obtaining an immediate $100 billion to $150 billion in new taxes, and Republicans obtain a similar-sized quick cut in spending, brace for a recession. With so many folks already unemployed or underemployed, it could be difficult to lift the economy off the mat again, even with trillion-dollar deficits.
It is important to recognize stronger third-quarter growth was on the back of inventory build and surging exports, whereas consumer spending, the big locomotive, slowed markedly. Inventory investments must moderate with the slower pace of consumer spending, and exports have already slowed considerably, thanks to policy dysfunctions and recession in Europe.
Consumers are hesitant to do more than replace wearing big ticket items and indulge in moderate outlays on nondurables like clothing, as worries about the fiscal cliff loom. More importantly, years of falling real wages constrain consumer buying power -- savings share of personal income is already very low.
Jobs lost to Chinese and other Asian competition in manufacturing continue to be replaced by lower paying positions in service activities and in what new manufacturing emerges, and the failure to replace many jobs altogether pins down the percentage of adults working and wages.
Further, many states have solved their budget woes by raising taxes and fees. Falling real wages, high unemployment and higher taxes create more tight fisted customers for Walmart (WMT) and Kia but fewer enthusiasts for Nordstrom and your local Ford(F) dealer.
Big caution in the auto-patch -- GM(GM) is discounting to clear piled up inventories, and the dollar value of retail auto sales is not matching the surge in vehicles sold.
Overall, the economy remains vulnerable to another shock -- be it the fiscal cliff, big tax increases and spending cuts to avoid it, or some other disaster. The focus on higher taxes in the "fiscal cliff" negotiations almost guarantees another year of tepid growth or worse.