2013 Looks Promising

 | Jan 03, 2013 | 5:00 PM EST  | Comments
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I am not much for predictions, but it's worthwhile to get a feel for what the new year might bring.

We just went through a presidential campaign, and much of the rhetoric suggested the U.S. economy was in dire shape. It certainly isn't bursting at the seams with growth and opportunity, but it isn't as hobbled as some might suggest, which may indicate a stronger 2013 than many expect.

Eurostat, the statistical office of the European Union, published a comparison last month of growth rates for various countries. Looking at growth in the third quarter of 2012 compared with the same quarter the previous year, the U.S. came out on top, with a growth rate of 2.3% (which has since been revised upward to 2.7% by the U.S. Commerce Department). Compare this to Germany, which grew 0.9%; Spain, whose economy contracted by 1.6%; France, whose economy expanded by a paltry 0.1%; Italy, which experienced negative growth of 2.4%; the U.K., which had no growth; and Japan, which grew 0.2%. The U.S.'s growth rate certainly is not high, nor is it at an acceptable rate since we still need to fully recover from the Great Recession, but compared to what is going on in other advanced industrialized countries, we are not doing too badly.

Job growth is a major issue, and there are increasingly positive signs. The Wall Street Journal last week reported that the construction industry lost about 2.2 million jobs in the housing bust, but only 58,000 jobs have been added since the housing bottom in January 2011. Yet the Journal says that "as the housing market starts to help lift the economy, construction looks poised to become a job creator in coming months." This optimism is built on a foundation that includes an increasing number of building permits issued and the lengthening of the average workweek for many construction workers to its longest since 2006, suggesting construction companies will soon have to start hiring new workers and instead of adding hours to those already on the payroll.

Even more significant is the ongoing slide in the unemployment rate to its current 7.7%, more than 2 percentage points below its level two years ago. Yes, the unemployment rate is still too high, but it has been showing real progress at being drawn down.

At the same time, personal income and expenditures are on the way up. On an inflation-adjusted basis, incomes and expenditures rose 0.8% and 0.6%, respectively (9.6% and 7.2% annualized), which Robert Johnson, writing on Morningstar's website, called "stunning" and noted was better than most observers had expected. Statistics from The Wall Street Journal support the idea that consumer expenditures are on an uptick that is likely to continue. The Journal notes that payments on household debt "are at their lowest level in decades, which is helping paychecks stretch further." Debt consumed 10.6% of Americans' after-tax income in the third quarter, the lowest level since 1983. People are not borrowing as much as they did, and have spent the last several years paring down the debt they had.

For the stock market, these are positive signs. More spending power, more jobs and more economic growth point to a solid business climate and improved profitability, which suggests the market could perform well in 2013.

Not everything is rosy, of course. The Organisation for Economic Cooperation and Development in late November cut its forecast for the developed world to 1.4% for 2013, down from a prediction of 2.2% just six months earlier. The U.S. is not an island, so what happens elsewhere in the world affects it. Right now, the health of the world economy is worrisome.

The fiscal cliff is another concern, as the government-spending reduction was kicked down the road another couple of months, but, from my contrarian point of view, that seems likely to be resolved before any real damage is done to the economy.

Without a crystal ball, I can't tell you how the economy and the market will perform this year. Both could certainly be derailed by a global recession or political gridlock in Washington, as well as events we cannot foresee. But right now, the indicators are generally positive and I expect 2013 has a good chance of providing a positive climate for investors.

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