Rather than cover the Fiscal Cliff and recent debt talks, I have decided to take a step back and try to look at the U.S. economy from both a detached (Ivory Tower) and ground level perspectives. Regarding the former, the Conference Board just released the January consumer confidence level and it dropped 8.1 to 58.6. Regarding the latter, I recently spoke to a C level player and he said the economy will get stronger over the near-term. Confusing signals? This article will point out even stranger ones in an environment that can only be termed as a place where we have never been to before.
The Negative Flags
On January 30 the Commerce Department stated that the U.S. economy contracted.1% in Q4 of 2012. It is logical to assume that the Fiscal Cliff dilemma and the slowdown in Europe contributed to this sharp drop from 3.1% GDP growth in Q3 of last year. America must deal with the fact that there are 12 to 18 million people currently unemployed. It also stands to reason the latter number would most likely be the case because the Labor Participation Rate via the Bureau of Labor Statistics has gone from 66.4% in December of 2006 to 63.6% in December 2012. In addition, there are millions of Americans that are working part-time who would like to work full-time. While the labor market is in better shape than three years ago it is still weak by historic standards and creating 150,000 jobs per-month will not help to lower the national unemployment rate. From a mathematical point of view America needs to create twice that amount to bring the level down to a 6% rate.
The Positive Flags
Regarding employment growth there are some very healthy local job markets. Case in point: I have family and friends in Houston and San Jose, and they can all substantiate the fact that these two cities have seen strong employment growth over the last 24 months. Enter housing. Most major studies indicate that U.S. housing prices have risen in most major cities in 2012. This event is helping millions of Americans regain some of the equity lost during the Great Recession. Some estimates say the average home owner lost approximately 30% from the peak (2005-2007), and they have since seen gains somewhere around 5% over the last 12 months. There is much more to go, but a gain is a gain. In addition, more equity makes people more comfortable and confident about spending on things like new appliances and other home improvements.
At the end of the day no one has a crystal ball as we witnessed by the latest GDP number. With Europe really going nowhere from a growth perspective it looks like a 2% GDP increase for the U.S. in 2013 seems like a somewhat optimistic, but realistic prognostication. There are both many positives and many negatives to consider, but one thing can be certain. We are in uncharted territory, and it will be a very interesting year.