U.S. OverviewRelief, But Little Excitement
Trend economic growth, low inflation and steady Fed policy provide the framework for our economic outlook. For the first half of this year, our outlook is for trend growth of 2.0 percent with contributions from consumer spending, business investment in both equipment & software and structures, and net exports as well as residential investment. Detracting from growth will be government spending and inventories. Current strength in consumer spending for the first quarter will likely slow as tax increases reduce disposable income. Equipment & software and structures should add to growth in the first half of this year, but at a slower pace than last year, as fiscal restraint hits contract spending and taxes rise. Residential investment will provide some offset to slower domestic demand elsewhere as housing affordability, demographics and the lure of low interest rates relative to home price appreciation support further recovery in the housing sector.
Inflation remains a back-burner issue for the economy and the Federal Reserve. The personal consumption deflator and the consumer price index measures of inflation remain below any threat point for the Fed. Corporate profit growth continues to slow as is typical at this stage of business expansion as unit labor costs rise, while top-line revenue gains remain steady. The outlook for growth and inflation supports the case for the Fed to remain on autopilot, with its open-ended Treasury and MBS bond buying program for the foreseeable future–given the expectation of 7 percent plus unemployment rates for both 2013 and the greater part of next year as well.
International OverviewNo Bad News: Good News for the Global Economy
After several years of weak and worrying news coming from the rest of the world, the first impressions coming from the global economy this year seem to have helped the mood for markets all across the world. Recent data confirm that the worst seems to be over and, while the future remains as uncertain as ever, at least there are reasons for optimism. Although the Eurozone is expected to remain in recession through the first quarter of the year, we expect the larger and stronger economies to help pull the region out of its current state during the rest of the year. The developed world is close to its limit in terms of fiscal sustainability and remains a threat to the rest of the global economy. Thus, the developing world will need to be more proactive with its fiscal levers to complement monetary policy expansion. Meanwhile, the global economy is starting to see some improvement coming from the usual suspects, spearheaded by economic growth in the United States and slightly better-than-expected Chinese economic growth. The latest purchasing managers’ indices (PMIs) for developed and emerging economies, as well as many manufacturing production indices across the world are pointing to a tenuous but positive recovery in economic activity. Meanwhile, service sector activity continues to advance, indicating that global consumption may be better than expected. It is too early to tell with certainty, but the worst of the global slowdown may be over. And, this is good news.