Fed Economist Sees Stronger Growth in ‘13

An economist with the Federal Reserve Bank of St. Louis, speaking Friday at the Morningstar Ibbotson Conference 2013 in Hollywood, Fla., said there were several factors that prompted him to “make the case for stronger growth in 2013.”

Kevin Kliesen, who shared his own views (not necessarily those of the Federal Reserve System), also cautioned “that economic momentum weakened over the last three months of 2012, though there were pockets of strength in key areas.”

Kliesen pointed out that the St. Louis Financial Stress Index, which tracks 17 indicators (including risk spreads), is now lower than its long-run average level. Plus, “Some calm has returned to European sovereign debt markets,” he said.

An additional positive factor is that business capital spending is rebounding, after remaining in a lull for most of 2012. “Financial market conditions are supportive of faster growth,” he said, “and there is not much worry about inflation in the near future.”

The economist shared three other sets of reasons behind his expectation that the economy will have a strong year in 2013:

• Consumer spending is improving, forecasters expect long-term interest rates to stay low, and household wealth should keep improving;
• Housing fundamentals “look good,” inventories are low, prices are moving higher, labor markets are seeing improvement, and affordability is high;
• Housing growth is usually followed by growth in business capital spending.

“It appears that most, if not all, of the excess housing inventory has been worked off,” Kliesen said.

Risks Ahead

The economist also outlined several trends that do not bode well for the U.S. economy in the longer term.