Growth May Rebound

 | Feb 08, 2013 | 1:00 PM EST
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There are some signs that 2013 could bring favorable growth prospects, but that assumes we get past the upcoming debates surrounding the looming sequestration with some kind of a favorable resolution.

That is uncertain, of course, and we also need to assess whether consumers are spooked by the end of the payroll tax cut and whether employers add staff once federal fiscal uncertainty ebbs. Let's explore a number of different economic strands and then weave them together.

First, businesses have been investing more into their equipment. In the latest GDP report, we see that investments in equipment and software increased by 12.4% at an annual rate from the third quarter to the fourth. More investment into their businesses might mean they expect conditions to improve, though the latest durable goods report showed that new orders for non-defense capital goods excluding aircraft (basically capex), slowed in December to 0.2% after 3% gains in November and October. Still, the fourth quarter marked growth in business investment, noting that new orders for equipment won't be reflected in GDP until those goods are actually produced.

Then we have employers that seem like they might hire a bit once the uncertainty ends, though the magnitude is uncertain. The Atlanta Fed did some research into potential hiring once fiscal policy is established. The researchers determined that businesses that are healthier have already been placing less emphasis on uncertainty than other businesses and have not curtailed hiring previously and so might not increase their hiring plans much more. Still, for some businesses this might be the catalyst they have been waiting for.

Then there is the fact that the trade balance has improved in December. The trade deficit in December was the smallest monthly figure since January 2010 per the International Trade report. In December, the goods deficit decreased $9.4 billion from November to $56.2 billion and the services surplus increased $0.7 billion from November to $17.7 billion. Exports of both goods and services increased, while imports of both goods and services decreased. (These figures are not included in the recent GDP report. The Bureau of Economic Analysis only included an estimate and will provide the more complete figures in the next iteration of GDP.)

While one might view falling imports as a sign of weaker domestic demand, bear in mind that companies in industries including retailing and wholesaling said their inventories are "too high" on balance, according to the ISM Non-Manufacturing report. They've been adding less to stocks even as they report new orders increasing. While new orders didn't grow as strongly in January as they did in December, they are growing enough that the employment metric in the ISM Non-Manufacturing report increased to 57.5 in January from 55.3 in December. (These new orders have not yet likely entered into production, so these won't be evident in certain other economic data reflecting actual activity.)

There are also reasons to temper enthusiasm. In the ISM Non-Manufacturing report, the organization included a note on new orders that, "Comments from respondents include: 'External client inquiries have slowed, especially on major projects' and 'Soft demand at this time.'" We also have the sequestration debates coming up, which are the spending cuts from the federal budget process. In addition, we have the effects of consumers' reduced payroll incomes, thanks to the end of the payroll tax cut, at the same time gas prices have risen.

So, while we might see stronger growth in 2013, the CBO expects the unemployment rate is expected to remain above 7.5% through next year, while GDP expands by just 1.4% this year and 3.4% in 2014, assuming federal spending cuts are implemented as current law plans.

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