Knowns and Economic Unknowns
12:00 AM, Nov 24, 2012 • By IRWIN M. STELZER
By the end of this long weekend, we will have eaten (46 million gobblers gobbled up), travelled (44 million 50+ mile trips in cars, planes, and trains), malled (147 million crazed bargain hunters), and spent enough time watching football to have become familiar with every vulnerable bone and ligament in the human body as player after player is carted off the field after some violent collision with an opponent’s behemoth. By Christmas, consumers will likely have spent about 4 percent more than they did last year in stores (bricks) and online (clicks).
For the first time, many retailers began their “door-buster” sales on Thursday evening rather than at 6 a.m. Friday, with Target ignoring the plea of some 400,000 petitioners to “save Thanksgiving” by remaining closed until Friday. More customers than ever, literally bloodied in past scrums, placed their orders on line. And the scramble for 40-inch flat screen TVs, $180 at Best Buy; Nikon digital cameras, $100 at Target; and HP deskjet printers, $29 at Walmart, will continue on cyber-Monday, when the web can be browsed at a leisurely pace on company rather than personal time.
There’s more, but you get the idea. Competition works for consumers, with technology making it so easy to compare prices that many retailers are offering refunds if competitors offer better deals. If you can’t be competitive “shame on you,” says Terry Lundgren, CEO of Macy’s, speaking from the floor of the chain’s New York Miracle on 34th Street against a background of customers that included thousands of foreigners in search of the bargains denied them by restrictions on competition in their own countries.
Whether consumers will continue to spend in the new year will determine the pace at which the American economy will grow in 2013. Some economists are calling a 2 percent annual growth rate “the new normal,” while quibblers who believe they can forecast growth within a few decimal points say 1.7 percent growth is more likely. Both guesses are based on the assumption that in 2013 consumers will continue to snap up large numbers of cars, and that the housing sector will continue to recover.
Auto sales should remain buoyant. The fleet of vehicles on the road is ageing, and with the jobless rate at least stabilized so that those in work can be reasonably confident that they will not be laid off—one of the reasons President Obama did so well despite continued high unemployment—there is little reason to defer gratification any longer. Besides, most buyers are sufficiently innumerate to be able to persuade themselves that the more fuel-efficient newer vehicles will “pay for themselves” in a relatively short time. So count on relatively good auto sales.
So, too, with houses. Interest rates are at record lows—around 3.3 percent for 30-year fixed-rate mortgages—and only last week Federal Reserve Board chairman Ben Bernanke told the New York Economic Club that the Fed will continue purchasing mortgage-backed securities to the tune of $40 billion each and every month to ensure that mortgage rates don’t go up. If not forever, at least into 2015. Sales of existing homes in October were 10.9 percent above year-earlier levels, and likely to end the year at their highest level since before the financial crisis hit. Prices are up 11 percent over last year, and inventories of unsold houses are down over 22 percent, to their lowest level relative to sales in almost seven years. The number of new homes being built and sold is also rising, although not to levels seen before the housing slump, and builders, whose shares by one measure are up 90 percent this year, are more confident than they have been since May 2006.
But one cheer only, please. Almost one-in-four sales were at prices below the level of the outstanding mortgage, banks are still reluctant to extend credit, and it is a long way from here to a housing market that will provide employment for lots of construction workers. Still, the trend is up rather than down.
Unfortunately, to predict with confidence that consumers will behave in 2013 as they have in 2012 is to ignore the warning by the distinguished Danish physicist Niels Bohr, who famously said, “Prediction is very difficult, especially about the future.” Doubly difficult in a world in which there are more known unknowns—things we know we don’t know—than is usually the case. We don’t know how better off consumers will react to the large tax increases that are in store for them next year. Not only is the president likely to get the increase in marginal income tax rates he is demanding—although the starting point might be families with annual incomes in excess of $500,000 rather than his preferred $250,000—but taxes on dividends and capital gains will rise, and the 3.8 percent Obamacare tax on their investment incomes will cut in, along with a host of other taxes buried deep in the bowels of the massive Obamacare legislation.
No one expects business investment, which has fallen off a cliff of its own, to be a growth-booster in 2013. A Wall Street Journal survey of the intentions of large corporations reveals that at least half are scaling back investment plans. Corporations, sitting on some $2 trillion in cash, blame the uncertainty surrounding the fiscal cliff for their unwillingness to part with cash. Well, that source of uncertainty will be no more in a few weeks, when a deal to avoid the cliff is likely (but not certainly, with the president determined to pursue “fairness” as well as cash, and Speaker Boehner throwing Obamacare back on the table) to be cut.
Unfortunately, the new certainty will include:
· a less favorable tax regime, shorn of many special benefits now enjoyed by the oil and other industries,
· rising health care costs as the provisions of Obamacare become effective,
· cutbacks in government spending on the defense and other industries,
· a flood of new regulations,
· a European recession that has shriveled exports to the EU-27, and
· pressure on profit margins and share prices.
So it is a reasonable guess that most corporations will remain reluctant to undertake major new projects.
Still, we have good reason to be thankful. Our slow growth tops the declines being experienced by many eurozone countries, our entrepreneurs continue to astound with new products, our banks are in better shape than most of those in other countries, a vigorously contested election did not see the jailing of a single dissident nor a single tire set alight, and we are about to enter an age of energy abundance that is luring manufacturing back to America. Any remaining problems can be cured by the politicians who created them.
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