Economists See (OK-ish) Growth In 2013

By Marilyn Geewax

Published January 2, 2013 at 12:09 PM CST

Farmer Randy Dreher unloads corn from his combine during harvest north of Audubon, Iowa. Farm exports are booming and high global prices are helping growers despite the U.S. drought.

Suddenly, the new year is looking a bit brighter — at least in the eyes of most economists and investors.

On Day 1 of 2013, Congress voted to veer away from the "fiscal cliff" by passing a package of provisions that avoided broad tax hikes and big spending cuts. And on Day 2, stock prices shot up.

"There's a lot of relief," said Mark Hopkins, senior economist with Moody's Analytics. "The worst-case scenario has been averted."

Yes, there will be new budget battles in February, after President Obama has had his second inauguration and the 113th Congress has gotten itself organized.

But for now at least, Americans can take some comfort in having more policy certainty about taxes. And that helps businesses with their planning for the new year, according to John Canally, an economist for LPL Financial, an investment-adviser consulting firm.

"People now know for certain what their tax rates will be," Canally said. "Financial markets don't like uncertainty. So today's rally is about people thinking: 'OK, now I know the landscape.' "

Like most other economists, both Hopkins and Canally say growth will continue in 2013, but not by a robust pace. That's because part of the legislation passed Tuesday by Congress will end the payroll tax holiday, which had been in place for two years. That will reduce take-home pay for all workers.

"The payroll tax comes back now and that will affect everyone right away," Canally said. "It will be a drag on the economy" because the typical household will have roughly $1,000 less to spend this year, compared with 2011 and 2012.

On the other hand, the rebuilding efforts in parts of the country hit by Hurricane Sandy this past autumn will generate jobs and spending, he noted. On balance, the economy should grow at about 2 percent in 2013, which would be roughly the same pace as 2012, he said.

That forecast is in line with other mainstream economists. The consensus is that growth will be well below the 3 to 4 percent expansion rate that would generate strong job growth and better incomes. But it should be enough to continue to whittle down the 7.7 percent jobless rate and keep the recovery growing into its fourth year.

Tom Porcelli, chief U.S. economist for RBC Capital Markets, predicts the housing market will continue its slow recovery in 2013. After a brutal slide since 2006, "housing has bottomed," he said. At this point, its turnaround is "well embedded" and unlikely to falter, he said.

"We do expect housing to continue to improve, albeit glacially," he said.

Industrial production will expand too, but at a rather disappointing rate of 2 percent, according to the Manufacturers Alliance for Productivity and Innovation, a trade group. "It will not be until the second half of 2014 that the economy will grow at what could be called a moderate pace," the group's chief economist, Daniel Meckstroth, said in his forecast.

But there are some brighter spots within manufacturing. Auto production, for example, should remain fairly healthy because Americans are buying more cars than they have in four years. Edmunds.com, which closely follows the auto industry, forecasts light vehicle sales will rise 4 percent over the pace set in 2012.

And aircraft makers are somewhat upbeat, mostly because of growth in overseas markets. Marion Blakey, head of the Aerospace Industries Association, said her trade group's number crunchers are predicting $6 billion in additional sales in the coming year.

"There's good news for 2013 — yes, that may surprise you," Blakey said at the AIA's annual forecasting luncheon in December. AIA says customers all over the world are upgrading fleets with more fuel-efficient aircraft, giving a boost to U.S. manufacturers.

Exports are the key to expansion in the agriculture sector too. The U.S. Department of Agriculture says that over the period from 2009 to 2012, farmers had the best four years ever for exports, which shot up more than 50 percent.

Brandon Kliethermes, the agriculture economist for IHS Global Insight, said most U.S. farmers and ranchers had a tough year because of drought. Still, with the help of federal insurance and high global prices, many were able to profit in 2012.

"They had a terrible production year, but from a financial standpoint, they came out fine," he said. That means they now have money to spend on preparing for spring. "They are upgrading equipment, buying new tractors and trucks," he said. "We keep having these droughts, but at some point, we'll have average weather."

If 2013 turns out to be that "normal" weather year and exports continue to be strong, "the potential for locking in profits is there," Kliethermes said.