PF Blog

Chugging Along

By: Bill Wood, MoldMaking Technology's Economics Editor
28. February 2013

Despite all of the turbulence created in recent months by the election, Hurricane Sandy, the Fiscal Cliff, and the pending sequester, the U.S. economy continues to chug along at an inflation-adjusted growth rate of about 2%. Real GDP has been growing at this rate on average for the past three years, and I expect it to continue to grow at this rate through at least the first half of 2013. This pace of growth has been enough to generate about 150,000 new jobs each month on average, though in recent months the job numbers have done a little better than this. At the current pace of GDP growth, the unemployment rate will drift lower slowly.

We should take some comfort from the recent resilience in both the employment data and the stock market's performance in light of the emerging fiscal austerity from Washington. Government spending fell sharply in the fourth quarter of 2012—so sharply in fact that it pushed the preliminary GDP figure down 0.1% for Q4. If the full sequestration goes into effect on March 1, then government spending will continue to be a large drag on economic growth. About half of the cuts in government spending will come out of the Defense Department budget. The best estimate is that this will subtract 0.5 percentage point from GDP this year.
Economic growth this year will be further burdened by the tax increases that went into effect on January 1st. The biggest effect will come from the expiration of the so-called payroll tax holiday. Households have not yet had time to digest fully the effects of this, but this will likely shave another 0.5 percentage point off of GDP growth in 2013. And finally, the increased tax rate on upper income households will likely push economic growth down another one or two tenths of a percentage point. So taxes have gone up, and government spending looks like it will be cut substantially. This is a recipe for another two quarters or so of subpar economic growth.

Offsetting these negative factors is the massive amount of monetary stimulus that the Fed is providing. The Fed now owns about $3 trillion worth of treasuries and mortgage-backed securities, and they continue to purchase these assets aggressively. They will likely continue this stimulus program until the unemployment rate drops below 7%, and by that time they will probably own about $4 trillion worth of securities.

This program, known as quantitative easing, has kept interest rates at very low levels for a long time now. This is driving the recovery in the residential construction and real estate sectors, and it is the primary reason that the stock market is currently very near its all-time high. Nobody quite knows how long this can last, or how it is all going to end. But for now, it seems necessary to keep our economic recovery on track. The underlying message in all of this is that the Fed is trying to encourage more risk-taking. Saving your money is not doing you any good right now, so put it to work by investing it in new equipment or new employees or both.

If all goes according to plan, then the weight of the fiscal austerity will start to ease in the second half of this year. Real GDP growth will ratchet up to 3% in the third and fourth quarters. In 2014, the rate of growth will rise to 4%. This may seem like an overly optimistic forecast in light of our present circumstances. But given the current low interest rates I think that the only way we will not hit these growth rates is if Congress does something really stupid like shut down the government. All of the Fed’s stimulus will likely come back to haunt us in the long run in the form of high inflation, but in the short term I believe it will certainly result in a faster pace of economic growth.

Comments are reviewed by moderators before they appear to ensure they meet Products Finishing’s submission guidelines.
blog comments powered by Disqus

Suppliers | Products | Experts | News | Articles | Calendar | Process Zones

The Voice of the Finishing Industry Since 1936 Copyright © Gardner Business Media, Inc. 2016

Subscribe | Advertise | Contact Us | All Rights Reserved