Thursday, November 15, 2012

U.S. Economic Outlook

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 multi-year 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.

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