Will U.S. Growth Slow in 2013?

Popular Economics Weekly

The naysayers are already at it. First Quarter GDP growth was 2.5 percent, slightly below forecasts. So many pundits are now saying it is a repeat of last year and the year before. An initial growth spurt started off those years, also, before a slowdown due to the U.S. Treasury debt downgrade by S&P and last year’s debt ceiling debate.

Now they say it’s sequester spending cuts and return of the payroll tax increase to its prior level that will suppress demand. Really? Real estate is beginning to recover, and job formation is still increasing. What does all that mean?

Graph: Calculated Risk

Friday’s unemployment report should tell us something about the future. Though just 88,000 payroll jobs were added in February when seasonally adjusted, the actual jobs increase was 729,000 before the seasonal adjustment. I therefore believe the seasonal adjustments were a bit draconian, as March is not usually a good hiring month, so the seasonal adjustment may be reduced—especially with the bad weather. Ergo, the February jobs numbers could be adjusted upward.

Home sales aren’t doing badly either. The NAR’s Pending Home Sale Index , a forward-looking indicator based on contract signings, rose 1.5 percent to 105.7 in March from a downwardly revised 104.1 in February, and is 7.0 percent above March 2012 when it was 98.8. Pending sales have been above year-ago levels for the past 23 months. (The data reflect contracts but not closings.)

Lawrence Yun , NAR chief economist, said the market appears to be leveling off. "Contract activity has been in a narrow range in recent months, not from a pause in demand but because of limited supply. Little movement is expected in near-term sales closings, but they should edge up modestly as the year progresses," he said. "Job additions and rising household wealth will continue to support housing demand."

Graph: Econoday

Household wealth, personal income, and spending also continue to increase, while inflation is declining. The Fed looks at Personal Consumption Expenditures (PCE), where overall prices have risen just 1 percent, annually. This is almost in deflation territory, which means the Fed will continue its QE3 purchases of Treasury bonds and mortgages. This is good for consumer spending, but signals less demand for consumer goods. Overall consumption spending is up 3.5 percent annually in March, a good number, vs. personal incomes that have been hovering around 2.5 percent.

The bottom line is that the loss of government payrolls and spending is bound to dent what otherwise would be a 3 percent GDP growth year. But it does look like real estate can take up some of the slack from those cut backs, as banks work off their backload of delinquent properties, the so-called “shadow inventory” of home held off the market.

Then we need to see state finances returning to health, but that is also dependent on a real estate recovery. Remember, much of the unemployment is happening in the states, where teachers, police and fire workers have been laid off en masse. So if real estate has a good year, the U.S. economy will continue to grow and maybe fool the naysayers.

Harlan Green © 2013

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