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.
The economist also outlined several trends that do not bode well for the U.S. economy in the longer term.
One of his main concerns is the impact of the jump in the payroll tax, “which should have a significant impact on the low and middle strata of consumers.” Compounding that problem and its impact on growth will be fiscal policy, he noted.
These shifts could lead to a 1.2% drop in consumption during the first half of 2013 and a 2.5% decline in the second half, said Kliesen, pointing to Goldman Sachs’ estimates.
While the markets don’t seem too worried, increased “rancor and political gamesmanship could dent consumer confidence and keep economic-policy uncertainty at elevated levels,” he explained.
Longer term, Kliesen said the high debt relative to the economy would reduce growth, including living standards. This happens as more resources are devoted to the public sector and fewer to capital investment.
This cycle can feed on itself and, when combined with higher future taxes, impact new technology.
“A fiscal exit strategy is necessary,” concluded Kliesen. “High levels of debt eventually lead to bad outcomes—choices must be made.”