2013 Economic Forecast

Robert J. Morgan, Economist, Austin Associates, LLC

A senior consultant with Austin Associates, LLC, Robert (Bob) Morgan consults with Citizens National Bank regularly regarding the economy and how certain regulations will affect the banking industry. Each year he presents to a group of our clients regarding the state of the current economy and how he forecasts that to change over the upcoming year. Here he answers some questions you may have about what to expect in 2013.

Will unemployment improve?

In 2006 the US had an unemployment rate under 5%. By late 2010 it was over 10%. Today it’s around 8%, which is an improvement. However this number does not reflect a true level of unemployment including those who have given up looking for work. The true rate is probably closer to 14% according to Morgan. “In order for unemployment to decrease we need to average 200,000 new non-farm payrolls each month. We’re currently around 100,000. It’s not enough.” New regulation and healthcare costs are giving many business owners pause when considering adding more employees. According to Morgan, 70% of employers in the US have no plans to add jobs in the next year. He also feels we may be looking at a long period of time of unemployment due to three reasons. 1) People lack training for the jobs that are available. Few jobs are available for unskilled workers. 2) People are not passing drug tests. 3) Increased automation in manufacturing has limited the amount of human labor required to perform a job.

What are the issues currently affecting the economy?

According to Morgan there are four key issues affecting our current economy:

  1. The Federal Reserve’s monetary policies are driving down interest rates and keeping them low for a long period of time.
  2. The primary financial objective of the average homeowner has changed. “In the 1960’s, every homeowner’s goal was to pay off his mortgage. By the 1990’s, the goal appeared to be to borrow as much as possible on the equity on your home – causing a boom in home equity loans and overleveraging of real estate. With the housing crises, we’re seeing a shift back to people wanting to pay off their houses as quickly as possible and that creates a structural change in how our economy operates.”
  3. The federal government continues to add additional debt without increased revenue. “The interest on our current national debt and the costs of Social Security and Medicare are the only things currently covered by revenue,” states Morgan, “We borrow money for every other government expense.” The government can continue to print money as long as other countries value it and will purchase bonds. The good news is many other countries are in much worse shape than the US and the dollar is still valuable compared to their currency.
  4. Gen Y is growing at a fast rate. Ninety-three million people will be age 18-34 in the next ten years, making it the largest and fastest growing group in the US. Unfortunately, the current lack of jobs and economic environment has hurt this group the most and recovery can’t continue until this group is able to contribute.

What needs to happen to boost economic growth?

“Consumer confidence is still 30% below where it was prior to the Great Recession. Seventy percent of our economy is driven by personal consumption, so until people are more optimistic they will not spend enough to affect real GDP growth, which ideally should be around 3.5%,” states Morgan. Consumer credit however is beginning to increase, mainly due to the auto industry. “With the average age of a car being 10+ years old, consumers are purchasing vehicles again which will be a huge benefit to Ohio,” explains Morgan. Existing home sales are also improving and investors are starting to purchase homes for rental purposes resulting in higher home prices. Once the inventory of current homes is decreased, construction of new homes will begin to pick up again and that could spark more employment for low skilled workers.

What are your predictions for 2013?

“There are tax cuts and FICA reductions that are set to expire at the end of this year. If those are not extended, it will result in a slowdown of our economy due to decreased incomes for working families,” states Morgan. However, he feels Congress will step in and avoid this. If so, here are his thoughts:

  • Deleveraging (paying down debt) will continue, though at a slower pace.
  • Long term tax rates will remain low.
  • The increase in healthcare costs will burden small businesses and some may opt out of offering health insurance altogether.
  • Federal regulations will continue to restrict some banking activities.
  • The European debt crises will affect trade-however there won’t be a decline in the value of the euro.
  • We will see revenue growth in agriculture, auto and manufacturing industries – All good things for Ohio.

The entire presentation will be available on CNB’s YouTube page in December. Visit http://www.youtube.com/cnbohio.

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