Let’s start with one “big picture” view of the economic landscape of the moment. TD Economics, an affiliate of TD Bank, is one firm that believes the main obstacle standing in the path of faster U.S. economic growth is a strong headwind blowing in from fiscal restraint.
"Without fiscal drag, the U.S. economy would be headed for a growth trajectory in the 3% to 4% range in 2013," noted TD Chief Economist Craig Alexander (at right) in a recent report.
"The worst of the consumer deleveraging cycle and its dampening effect on economic growth appear to be over, but just as the private sector is set to provide a welcomed tailwind to the economy, it will be met with worsening cross winds from public sector restraint,” he cautioned.
Alexander acknowledges that the result is likely to be a pace of economic growth that is little changed from the past year. Indeed, TD Economics forecasts economic growth to average 1.9% in 2013 – down from an estimated 2.2% in 2012 – though by the second half of next year, clearer fiscal policy should lead to resurgence in private demand, putting the economy on track to achieve 3% growth in 2014.
The problem, though, is that “businesses are pulling back on investing, despite healthy balance sheets and record low interest rates, is a sign that fiscal cliff concerns have already taken a toll on economic growth," warned Alexander, who predicts that if the nation does go over the fiscal cliff – allowing all the tax hikes and spending cuts to take place as scheduled – it would cut three percentage points from real GDP in 2013.
"Our forecast assumes a deal will be made that avoids plunging the U.S. economy back into a recession in the first half of 2013," Alexander said. "However, spending restraint and tax increases will still cut economic growth by 1.3 percentage points in 2013.”
He added that, until there is more clarity on the political front, the fiscal situation represents the largest source of economic uncertainty.
Indeed, another forecast issued by KeyBank noted that right it’s “business as usual” economically speaking for the U.S., but not in a good way.
According to the latest KeyBank Middle Market Business Sentiment survey, more than two-thirds (67%) of middle market executives have a fair to poor outlook for the US economy in the next 12 months. Only 16% of those surveyed are more confident in their businesses' potential to thrive post-election.
In addition, the percentage of middle market business executives planning on increasing cash reserves nearly doubled. Pre-election surveys indicated 23% planned on increasing already robust cash reserves, but that leapt by another 23%, according to KyBank’s post-election surveys.
"Middle market business executives need certainty to make plans," said Cindy Crotty, KeyBank executive vice president and head of KeyBank's Commercial Banking segment.
"Before they can switch gears from saving to expanding, they need to see our leaders in Washington avoid the fiscal cliff," she said. "More importantly, middle market executives want assurance our leaders will work together to create an economic path to progress. They might not like the policies, but at least they would know what to expect and be able to plan accordingly.”
Other findings from KeyBank’s research show:
- Seventy percent of middle market businesses are extremely or very concerned about the fiscal cliff given the outcome of the election.
- When asked how their perspective on the fiscal cliff has changed post-election, nearly half (47 %) of businesses are more concerned.
- There has been a 9% decrease in business owners planning to add employees since August. That's in part because middle market businesses, which are significant employers, have become accustomed to running leaner and may remain as such for the long view, said Crotty.
"After a period characterized by improving housing data and waning energy prices this fall, the underlying fundamentals for consumer spending are beginning to deteriorate," noted Carl Steidtmann (at right), Deloitte's chief economist and author of the firm’s monthly index.
"However, the impact may not be felt until the beginning of 2013,” he added. “While the fiscal cliff debate continues, it is unlikely to significantly weigh down holiday season sales. However, tax increases early in the year are likely to take an immediate toll on consumer spending."
The Index, which is comprised four components — tax burden, initial unemployment claims, real wages and real home prices — fell sharply this month to 3.89 from a reading of 4.14 the previous month. The Index reflects data through October but does not yet reflect the complete impact of Hurricane Sandy, Steidtman pointed out.
Deloitte's analysis of factors influencing consumer spending further indicate:
- Significant downward revisions in both new home sales and income data were published this month. The new home sales data shows sales began to flatten out in February. The increased building activity in recent months may increase the market inventory rather than reflect homes sold, and may result in a pullback in building next year. The inventory issue is now putting downward pressure on home prices.
- Incomes were revised down sharply for the past six months. Real disposable income in October is $20 billion below May levels. Like housing, incomes had a nice run-up in the early months of the year but now appear to have stagnated since the end of spring.
- October consumer spending data shows a 0.3% decline. Further declines may emerge in the November data as a result of Hurricane Sandy's impact. With 70% of GDP coming from consumer spending, there is a risk that fourth-quarter GDP could be negative. A negative outcome to the fiscal cliff debate will likely contribute to a weak first-quarter GDP number as well.
"Retailers are positioned to finish the holiday season on a high note, but the outlook for the New Year puts added pressure on them to outperform ahead of a possible slowdown in January," added Alison Paul, Deloitte’s vice chairman and the firm’s retail & distribution sector leader.
Yikes! Certainly not an outlook that will spread cheer for the freight sector by any means.
