Near-Term Economic Outlook ‘Uncomfortable’

10.01.2012
Economy

Leading analyst looks for improvement later in 2013; says housing market will be key driver of recovery

By Bill DeRosa

Ryan Sweet, senior economist for the U.S. Macroeconomics Team at Moody’s Analytics, speaking at CBIA’s Connecticut Economy Conference in Rocky Hill. The Sept. 7 event drew 225 business leaders from across the state.

If you’re worried now, you’ll still be worried over the next six months.”

That bit of inspiring economic news came from Ryan Sweet, senior economist for the U.S. Macroeconomics Team at Moody’s Analytics, speaking at CBIA’s Connecticut Economy conference on Sept. 7 in Rocky Hill. He noted that over the short term, U.S. GDP will continue to average around 2%, “which is positive, but below the economy’s potential.”

The news, however, wasn’t all bad. Sweet told the 225 business leaders in attendance that although the next six to nine months “are going to be uncomfortable for the U.S. economy, by this time next year, [we’ll] be in much better shape.”

‘A Lot of Cliffhangers’

What’s preventing a more robust recovery, the kind we’ve seen following other recessions?

“Businesses are nervous,” says Sweet, “and when businesses are nervous, they’re not going to hire, and when they’re not hiring, consumers are not going to spend.”

He blames this state of affairs in large part on worry over political uncertainties. “By this point in a recovery, we should be seeing less uncertainty,” says Sweet. “But in fact, we have more, and this is really weighing on consumers, businesses, and investors. There are just too many questions and not enough answers.”

The most important questions center on the European debt crisis, U.S. monetary policy, and U.S. fiscal policy: in particular how policymakers choose to address the Jan. 1 “fiscal cliff,” when deep across-the-board spending cuts are triggered and the Bush-era tax cuts are set to expire.

Sweet believes that in light of recent action by the European Central Bank to buy sovereign debt, Europe will become less of a threat. And he foresees the Fed continuing to take measures to stimulate the economy through quantitative easing. The big cliffhanger, he says, is the fiscal cliff: whether or not policymakers will allow the spending cuts to kick in and the tax cuts to expire.

The most likely outcome? Sweet forecasts that policymakers will scale back the spending cuts and extend the Bush tax cuts for everyone but those in the top bracket.

Housing to the Rescue?

“The composition of growth is shifting,” says Sweet, noting that manufacturing: which has been the bright spot in the recovery so far: is beginning to slow. In addition, he says, consumer spending, typically about 70% of GDP, will be sturdy but not enough to drive growth. So where will it come from? “We need to turn to housing,” he argues.

“Housing is showing signs of life, partly because the job market is slowly improving and mortgage rates are at historic lows. I think potential buyers are starting to get the itch to go out and buy a house.”

Housing prices are beginning to edge up, says Sweet, and once they make a definitive move, “that will be enough to get people off the bench and into the housing market.” He points out that home sales are picking up, builders are feeling more confident, and retail sales of building materials and furniture are increasing.

“This pent-up demand is one of the reasons we think the economy will pick up in late 2013 and 2014. As house prices pick up, household wealth is going to improve. People will start buying more goods and services, because they feel better.”

Sweet cautions that this won’t happen overnight but predicts that the housing market will “shift from being a drag to a driver of the economy.”

Bill DeRosa is editor of CBIA News. He can be reached at bill.derosa@cbia.com.

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