By PHILLIP M. PERRY
Overcast with clearing skies. That’s the economic forecast as businesses enter a new year. Drizzly conditions will remain at least for the first half of 2013, as consumers hold tight to their pocketbooks. Light should break through the clouds in summer and fall, though, as the resolution of critical uncertainties encourage corporate hiring, capital investment and consumer spending.
The coming year as a whole is not expected to bring significant relief over 2012. “We expect the recovery to remain lackluster,” says Sophia Koropeckyj, managing director of industry economics at Moody’s Analytics, a research firm based in West Chester, Pa. (www.economy. com). “The pace of growth will be too slow to meaningfully bring the unemployment rate below eight percent.”
The numbers tell the tale. The most common measure of the nation’s economic health is growth in gross domestic product, the annual total of all goods and services produced in the United States. Moody’s expects GDP to increase by 2.4 percent in 2013. That’s not much of an improvement over the 2.3 percent anticipated for 2012 when figures are finally tallied.
Moody’s forecast might not seem all that bad, given that the GDP increase for an economy in average growth mode is 2.5 percent. But there’s a problem: A nation recovering from a recession needs more robust expansion. “By most measures, this recovery is among the weakest in the past 50 years,” says Koropeckyj.
What’s holding things back? Koropeckyj points to a number of areas. “Fiscal restraint on the local and national level, weaker global demand, a housing market that has hit bottom but has a long way to go to become healthy, and weak income growth are all constraining a stronger pickup in employment.” Other factors are the weakening economies of China and Europe—both important export markets.
All those factors are coming together to subdue the public mood. “Consumer confidence is still at a level consistent with a recession,” says Scott Hoyt, Moody’s senior director of consumer economics.
“Consumers remain concerned about economic conditions. There is still high unemployment, weak growth in wages, volatile stocks and high gasoline prices. There are a lot of things to keep consumers on edge.”
Retailers will suffer as concerned consumers hold onto their purse strings. “We expect the retail environment to be difficult in 2013, growing at some 2.3 percent,” says Hoyt. That pace represents a de-escalation from the 3.2 percent anticipated when 2012 figures are finally tallied. To put those figures in context, average annual core retail sales grew at 4.6 percent prior to the 2008 financial crisis. Core retail sales exclude volatile revenues from auto sales and gas stations.
Moody’s expects pressure on retailers early in the year because of the major weight of a constraining federal fiscal policy. While consumer confidence spiked upward a little in early fall, consumers will continue to be impacted by the anticipated terminations of two initiatives: the Social Security payroll tax holiday and extended unemployment insurance benefits. Reduced federal spending, by eliminating some jobs, will also have an indirect but significant effect on consumers.
“Retailers are most concerned about jobs and income,” says Hoyt. “The economy is not adding jobs fast enough to lower unemployment. Wage growth remains weak, and it is not putting the cash in the pockets of consumers that retailers would like to see.”
If the economy remains troubled, corporations have managed to thrive. By piling up mountains of cash they have positioned themselves for a fresh round of capital and labor investment when the time is right. “Businesses are in excellent financial health; their costs are down and they have become highly competitive and profitable,” says Koropeckyj. “Employers have little slack in their labor forces so layoffs have declined dramatically.”
Other sectors of the economy also show improvement. “Banks have never been as well-capitalized or as liquid,” says Koropeckyj. “Households have aggressively worked down their debt burdens and are meeting their obligations more diligently.”
And how about housing, that all-important driver of economic health? While still far from robust, it’s on the mend. “Residential construction and home sales have been trending up since mid-2011,” says Koropeckyj. “Residential construction-related jobs are also slowly creeping up. The months of inventory of new homes are low, having fallen below five months, and existing-home inventories have stabilized around 6.5 months, not far from the normal rate.”
Thanks to tightening inventories, housing prices are showing signs of a rebound after a dismal few years, says Koropeckyj. “Other signs of a healthier housing market include a rapid decline in the rental vacancy rate, stabilization in homeowners’ equity, and low early-stage mortgage delinquency rates.”
Additionally, says Koropeckyj, record low mortgage interest rates and the expansion of the Home Affordable Refinance Program are boosting mortgage refinancing. “That will help to free up household cash to spend on other consumer goods as well as prevent some additional foreclosures.”