Prospects
for the U.S. economy in 2013 are brightening …unless the politicians permit the economy to go over the “fiscal cliff” (the
combination of government tax increases and spending cuts scheduled to take
effect at the end of the year unless the Congress and the Administration take
preventive action). We do not expect
this to happen, and there may well be a significant stock market gain if a
political compromise removes the danger.
In our last
two Outlooks, we highlighted the
progress underway in the multiyear restoration of consumer confidence and
spending, the housing market, and the banking industry. We emphasized that each of these three key
sectors was crippled during the 2008-09 recession. From the outset of the recovery, we referred
to them as “structural impediments to growth,” which would take years to heal
fully despite pro-growth fiscal and monetary policies from Washington. Our point was that whereas they restrained
recovery over the past three years, we now expect each to support growth in
2013.
A number of
recent reports and developments lead us to conclude that the U.S. economy is
already strengthening:
·
Consumer confidence is at a 5-year high.
·
Consumer spending, bolstered by 2 consecutive
upbeat employment reports, is resulting in better than expected retail
sales.
·
A retreat in gasoline prices further supports
consumer confidence and spending.
·
The housing market has clearly bottomed in
response to rising demand, reduced foreclosure pressure, and record low
mortgage rates.
·
Bank profits are up, balance sheets are much
stronger, and loans are increasing.
·
The Federal Reserve has stated unambiguously its
top-priority is economic growth and has promised to keep interest rates low
until recovery is assured, which many expect to be 2014 at the earliest.
·
U.S. exports may well benefit from the
continuing initiatives taken by central banks around the world to stimulate
growth. International Strategy and Investment
(ISI), a highly respected economics research firm, has counted 296 easing steps
by central banks over the past 14 months.
The mostly positive economic news
of the past 1 1/2 months supports our above-consensus October 1 forecast of
2.0-2.5% GDP growth in 2013. This would
not qualify as healthy growth, but nevertheless represents an improvement over
2012.
Hurricane Sandy has inflicted
significant human hardship and misery, and has caused near-term economic
disruption. However, in the long-term we
expect the recovery efforts and the resilience of the people and businesses
affected by this tragedy to rebuild, thus mitigating the overall economic
impact.
The major threat to our generally
favorable outlook for continued economic expansion is the “fiscal cliff.” We continue to think there will be a
political compromise because neither party can afford the risk of being blamed
for an avoidable recession. We are
encouraged that leaders of both political parties have expressed a willingness
to compromise. Nevertheless, we do not
underestimate the impact of partisan politics and recommend that investors
maintain vigilance and flexibility.
We encourage our clients to contact
us and let us know their views.
