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Fri December 28, 2012
Economy

Reading The Economic Tea Leaves For 2013

Originally published on Fri December 28, 2012 4:06 pm

The U.S. economy was a bit of a disappointment in 2012. During the early months of the year, job creation was surprisingly strong, but by the end of the year, uncertainty about the election and the "fiscal cliff" slowed the economy's forward motion. So will 2013 look any better?

Mark Zandi of Moody's Analytics says that while Washington likely will steer us away from the fiscal cliff at the last minute, some elements of the deal will be a drag on the economy early in 2013.

"I think we start off slow because we will have some tax increases and some spending cuts, but I think by this time next year, the end of 2013, the economy will be gaining momentum. Housing will be kicking into gear, businesses will be hiring more, and we'll feel a lot better about things," Zandi says.

If we avoid the fiscal cliff, Zandi thinks the economy could be growing at a rate of about 3 percent by the end of 2013, an improvement from the 2 percent range of the past couple of years. And he says a housing revival will be key.

"That's been the missing link. In most economic recoveries — actually in every economic recovery since World War II — it's been a revival in the housing market that has led the economy out of recession into recovery. Obviously that's not been the case in this go-around. Housing was ground zero for our economic problems, but that's starting to shift," Zandi says.

The shift began in 2012, and Zandi expects housing to turn up in a big way in 2013.

Nariman Behravesh of IHS Global Insight agrees. He sees housing as a growth driver and rising home prices as a confidence builder for consumers.

"They're more upbeat, they feel more confident about the value of their homes and their neighborhoods and all that, so all of this is translating into fairly strong consumer spending, which as you know is 70 percent of the economy," says Behravesh.

Behravesh says another area of strength is energy production. He says oil and natural gas production in the U.S. will continue to boom.

"And it's not just energy — it's downstream industries, as it were, things like chemicals, for example," he says. As an industry, "chemicals all of a sudden have access to huge amounts of cheap natural gas, which is a big feedstock for them, and it's making the U.S. chemicals industry highly competitive, and they're adding jobs, adding facilities," he says.

The industry is producing chemicals for export for the first time in 30 years, says Behravesh.

But while the economy may gain strength in 2013, Joel Prakken of Macroeconomic Advisers in St. Louis says the unemployment rate is unlikely to fall much. The unemployment rate in November was 7.7 percent, according to the Bureau of Labor Statistics. It was 7.9 percent in October.

"Given our forecast of GDP growth next year of around 2.5 percent, we see the unemployment rate treading water — maybe coming down slightly, but still being well up into the sevens even at the end of 2013," says Prakken.

Zandi says the unemployment rate could actually go up before it comes down. But he says, by the end of 2013, the picture will brighten and monthly job creation will be in the 200,000 range after two years of being stuck at about 150,000 jobs a month.

"By the end of 2013, businesses will be hiring aggressively enough that job growth will be strong enough that we'll all feel like the economy is definitively moving in the right direction," Zandi says.

But all these economists say there are risks to this forecast even if we avoid the fiscal cliff. At the top of the list is a conflict with Iran over its nuclear program, which could lead to a sharp increase in oil prices, says Prakken.

"I can imagine, in this sort of explosive mix of tension in the Middle East, a scenario in which oil supplies are temporarily threatened and oil prices spike upward," he says.

Europe's ongoing financial crisis could also be a threat to U.S. growth in 2013. However, all of these economists believe that threat has diminished in the past months.

And if we don't avoid the fiscal cliff, Zandi says what happens next won't be pretty.

"I don't even want to think about it. I mean, unemployment will go back into the double digits. We'll label this a depression," Zandi says.

That's a more dire view than most economists have, but most predict another recession is almost certain if the fiscal cliff is not resolved.

Copyright 2013 NPR. To see more, visit http://www.npr.org/.

Transcript

AUDIE CORNISH, HOST:

This year, the economy has been a bit of a disappointment. During the early months of 2012, job creation was surprisingly strong. But near the end of the year, uncertainty about the election and the fiscal cliff slowed the forward motion. So will the economy fare better in 2013? We asked NPR's John Ydstie to look forward.

JOHN YDSTIE, BYLINE: Mark Zandi reads the economic tea leaves with his complex computer models at Moody's Analytics. He believes Washington will steer us away from the fiscal cliff at the last minute, but he says some elements of the deal will be a drag on the economy early in 2012(sic).

MARK ZANDI: I think we start off slow because we will have some tax increases and some spending cuts, but I think by this time next year, the end of 2013, the economy will be gaining momentum. Housing will be kicking into gear, businesses will be hiring more and we'll feel a lot better about things.

YDSTIE: If we avoid the fiscal cliff, Zandi thinks the economy could be growing at an annual rate of about 3 percent by the end of 2013, an improvement from the 2 percent range of the past couple of years. And he says a housing revival will be key.

ZANDI: That's been the missing link. You know, in most economic recoveries, actually in every economic recovery since World War II, it's been a revival in the housing market that has led the economy out of recession into recovery. Obviously that's not been the case this go-around. Housing was ground zero for our economic problems, but that's starting to shift.

YDSTIE: The shift began in 2012, and Zandi expects housing to turn up in a big way in 2013. Nariman Behravesh of IHS Global Insight agrees. He sees housing as a growth driver and rising home prices as a confidence builder for consumers.

NARIMAN BEHRAVESH: They're more upbeat, they feel better about the value of their homes and their neighborhoods and all that, so all of this is translating into fairly strong consumer spending, which as you know, is 70 percent of the economy.

YDSTIE: Behravesh says another area of strength is energy production. He says oil and natural gas production in the U.S. will continue to boom.

And it's not just energy. It's downstream industries, as it were, things like chemicals, for example. Chemicals all of a sudden have access to huge amounts of cheap natural gas, which is a big feedstock for them, and it's making the U.S. chemicals industry highly competitive and they're adding jobs, adding facilities.

And for the first time in 30 years, says Behravesh, the industry is producing chemicals for export. But while the economy may gain strength in 2013, Joel Prakken of Macroeconomic Advisers in St. Louis says the unemployment rate is unlikely to fall much.

JOEL PRAKKEN: Given our forecast of GDP growth next year of around two and a half percent, we see the unemployment rate treading water, maybe coming down slightly, but still being well up into the sevens even at the end of 2013.

YDSTIE: Moody's Mark Zandi says the unemployment rate could actually go up before it comes down. But, he says, by the end of 2013, the picture will brighten and monthly job creation will be in the 200,000 range after two years of being stuck at about 150,000 jobs a month.

ZANDI: By the end of 2013, businesses will be hiring aggressively enough that job growth will be strong enough that we'll all feel like the economy is definitively moving in the right direction.

YDSTIE: But all these economists say there are risks to this forecast, even if we avoid the fiscal cliff. At the top of the list, a conflict with Iran over its nuclear program, which could lead to a sharp increase in oil prices, says Joel Prakken.

PRAKKEN: I can imagine in this sort of explosive mix of tension in the Middle East, a scenario in which oil supplies are temporarily threatened and oil prices spike upwards.

YDSTIE: And the resulting increase in gasoline prices could damage the U.S. economy. Europe's ongoing financial crisis could also be a threat to U.S. growth in 2013. However, all of these economists believe that threat has diminished in the past months. But what if we don't avoid the fiscal cliff? Moody's Mark Zandi says it won't be pretty.

ZANDI: I don't even want to think about it. I mean, unemployment will go back into the double digits. We'll label this a depression. You know, the 1930s, go back to the 1930s, it was really two big recessions with some growth in between and that would be what would happen here and we would label what we went through as another depression.

YDSTIE: That's a more dire view than most economists have, but most predict another recession is almost certain if the fiscal cliff is not resolved. John Ydstie, NPR News, Washington. Transcript provided by NPR, Copyright NPR.