ORLANDO, FL. If not driven over the “Fiscal Cliff” next year due to inaction by Washington or not overly impacted at any point by the ongoing Eurozone financial crisis, the U.S. economy will continue to grow into next year, albeit at a “modest pace,” said Bob Costello, chief economist & VP of the American Trucking Associations (ATA), who presented a wide-ranging economic update here at the annual TMW TransForum User Group Conference.
Specifically, Costello forecast that U.S. gross domestic product (GDP) will grow an average of just 1.5% through the rest of this year and on into next. He said GDP “won't get to 2% growth until the 3rd quarter of next year."
He went into detail on the risk posed by triggering the Fiscal Cliff. The term refers to enactment of a large reduction in the federal budget deficit that would slow down the economy if specific laws are allowed to automatically expire or go into effect at the beginning of 2013.
Costello called the Fiscal Cliff a “policy-driven” risk, meaning it is up to Congress to prevent it. But, he cautioned, lawmakers may do nothing about it until sometime next summer. “Inaction [thus far] on the Fiscal Cliff is already putting a significant drag on the economy. He noted that adding to the uncertainty is the federal debt-ceiling limit that is also coming due in 2013.
“Concern over the cliff is leading businesses to reduce hiring and [capital] investments.” He said even those businesses flush with cash are avoiding any “risk-taking” that normally would help boost the economy. “Business investment is already plunging and that is coupled with sluggish hiring” causing GDP growth to suffer. He added that “we are not saying recession [is imminent], but that we’ll have less GDP growth than we could be having.”
Unfortunately, Costello expects the lame-duck Congress that will return to work after the elections “will kick the can down the road” and it will be the job of the new Congress to deal with it, but that most likely won’t happen until next summer. “That punt will delay the immediate consequences, but hurt the economy by continuing uncertainty [over its eventual impact].”
While the fiscal cliff can be avoided by the strokes of pens, Costello said that if the Eurozone economic crisis worsens, it will create further uncertainty for business that would hamper U.S. economic growth.
Despite the partisan gridlock that has prevented action on the Fiscal Cliff here at home and the economic problems overseas that can roil our economy further, Costello pointed out on the upside that “ironically some U.S. economic fundamentals look better in 2012,” including most notably housing—which he said is gaining momentum.
“Housing is turning the corner so much so that in the next few years I would not be surprised if we have a housing shortage,” he stated, “as so far we have been under-building housing.”
Costello explained that one of the biggest drivers of housing starts is what he termed family formation. He said young adults have been delaying starting families—which leads them to buying houses—thanks to the weak economy. “Once the job market improves and pay goes up, demand for housing will rise.” He added that this is “already happening but at a low level” and that means trucking “will see higher volumes out of housing next year.”
Turning to manufacturing, he said there is a short-term concern that if orders for manufactured goods don’t pick up, manufacturing production will slow. “Manufacturing is still outperforming GDP, but output is becoming more volatile. However, he added that “in the long run, domestic manufacturing is looking quite good.”
Specifically, he said that right now durable goods are very strong. “Total manufacturing is up 5% in 2012 with durable goods up 8.4% and non-durable goods up 1.1%. But orders have slowed enough to decelerate future production.” He explained that that means in 2013, total manufacturing will rise only 2.7%, with durable goods going up 4.7% and non-durable goods just 0.8%. “So, next year, we won’t see the same freight growth from manufacturers.”
Costello stated that he is concerned about the ratio of inventory to sales. "Since 1990, there has been a dramatic decline in the inventory- to- sales ratio because the supply chain has become much more efficient. But over the last few months, inventories have moved slightly up as retail sales have fallen."
On the other hand, he pointed out that when it comes to inventories and sales, “weird stuff has been going on this year—the warm winter for one threw off the usual seasonal demand patterns. Nonetheless, [retail] sales did fall for three months in a row.”
Lastly, Costello advised approaching stats about what he called the “schizophrenic job market” carefully. He said to look not at the unemployment rate because it is skewed by not including those who have given up on looking for a job.
Rather, he said to keep an eye on the number jobs created or loss each month. “We need to be creating 200,000 jobs a month to bring the unemployment rate down. I'll take 150,000 at this point, but if we are below 100,000 for a period of time, that is not good."