The 2013 Economy … What Will It Bring?

There is always noise when looking at economic forecasting for a coming year. The blaring this year has been deafening, but, not unprecedented. Therein lies the back story as we begin to look out into next year.

Kevin Clark is a Senior Vice-President with Raymond James and Associates, and is a contributor to The Brenner Brief. Twitter @kcstock

Kevin Clark is a Senior Vice-President with Raymond James and Associates, and is a contributor to The Brenner Brief. Twitter @kcstock

There are basic principles of economics, certain laws that mostly hold true. Sometimes those laws may be suspended for a time, but ultimately those laws are applicable.

As with any forecast, you have headwinds and tailwinds — those forces that act as a drag on an economy and those forces that seem to push an economy. This coming year, 2013, will have both.

Usually, there is one more factor — an event or condition that didn’t make the radar; something you would not have expected or even seen coming. Life is like that. We simply don’t know what we don’t know and that is what creates opportunity — the chance to make money when the winds and noise are overwhelming.

Let’s start by looking at the headwinds beyond the obvious fiscal cliff. Although housing has been showing some signs of improvement, the pace of new housing and the drag of underwater home owners have not reached levels to grow the economy beyond a baseline projection. The housing bubble created a tremendous amount of household wealth, and the housing collapse stripped it away. With slow growth forecasts for the overall economy it’s unlikely housing will see a major turnaround next year or add significant growth.

Despite historic low-interest rates, tight credit conditions for some borrowers have muted demand and the velocity of excess liquidity remains in the slow lanes. Compounding slow growth conditions, the attempt to control government spending will be contractionary as less government spending will take money out of the economy. In a balanced budget scenario, less government spending would keep money in the private sector but with the federal government borrowing nearly 40 percent of what they spend — it simply means we borrow less. In the long run, I believe that is positive, but in the short run it’s a fiscal drag.

Europe continues to show grudgingly slow reform. Most signs point to recessionary conditions, and monetary stimulus has been slow and somewhat awkward. There is little chance of that changing soon. With global growth bumping along on the low-end of the range, it’s reasonable to forecast challenging conditions for our exporters.

When looking at tailwinds, you need look no further than the Federal Reserve. The unprecedented easing by our central bank has forced trillions of dollars into our economy. Even though that money continues to pile up on the sidelines, there is a naturally positive effect on equity prices, as the potential for that money could be very constructive if it ends up in the stock market. I believe it is reasonable to expect that the Fed will be as accommodative as they see necessary in order to avoid recession and rising unemployment — that has been their track record. The Fed, as a tailwind, can offset a litany of headwinds in an economy. The old Wall Street adage stands: “Don’t fight the Fed.”

My wild card for next year revolves around our currency. That phrase, “sound as a dollar,” has been true as the world clamored for US Treasury bonds to protect their wealth. What concerns me is that “sound as a dollar” may turn into “the Humpty Dumpty dollar” as there are unresolved issues over the fiscal cliff, the debt ceiling, our credit rating and ultimately our standing as the world’s reserve currency. Ben Bernanke is either a genius or the greatest enabler in US history for reckless governance. Time will tell.

For investors, you should ask yourself this question: what does your wild card look like? What needs to happen for you to trust our financial markets? Currently, many investors remain reluctant to trust the market, passing up opportunity for the safety of the sidelines and cash. To me, it feels as though 2013 will be the year where the Fed loses influence, and the market forces become the catalyst for needed reforms and normalized trading.

Buckle your seat belts. Your 2013 flight could face some turbulence before leveling off.

 

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