U.S. Avoids Fiscal Cliff but Familiar Challenges Remain
With the noteworthy exception of the nation’s still expanding national debt, 2012 will be viewed by economic historians as predominantly a year of progress. Financial markets performed, the number of jobs expanded, unemployment fell, auto sales surged, housing prices stabilized and consumers were active. According to the most recently revised estimate supplied by the Bureau of Economic Analysis, national gross domestic product expanded 3.1 percent during the third quarter of 2012 on an annualized basis. The fourth quarter wasn’t nearly as good, and though fourth quarter data have yet to be released, the expectation is that the U.S. economy expanded only about 1 percent on an annualized basis during the quarter. Despite that, many economists estimate that the nation’s economy expanded 2.2 percent last year, a bit better than 2011’s 2.0 percent performance.
Equity markets started 2013 with a bang, in part because of news regarding partial resolution to a variety of fiscal cliff issues. On the year’s first trading day, the Dow Jones Industrial Average soared 308.41 points or 2.4 percent to 13,412.55. The S&P 500 rose 36.23 points (2.5 percent) to 1,462.42, the index’s biggest one-day improvement in more than a year (December 20, 2011). The NASDAQ composite index rose 92.75 points, or 3.1 percent, to 3,112.26.
While all major stock indexes were down for the fourth quarter, they were up for the year. The Dow Jones Industrial Average rose 886.58 points from 12,217.56 on December 30, 2011 to 13,104.14 one year later (7.3 percent). The S&P 500 rose 13.4 percent to 1,426.19 and the NASDAQ was up 16 percent to 3,019.51.
Despite the heightened uncertainty that characterized the fourth quarter, businesses continued to hire. In December, the nation added 155,000 nonfarm jobs (168,000 private sector jobs) following a gain of 161,000 jobs in November and 137,000 in October. For the year, the nation added approximately 1.84 million net jobs, almost exactly the same number added in 2011. Job growth was sufficient to tug the nation’s unemployment rate below 8 percent. In January 2012, unemployment stood at 8.3 percent. By December of the same year, the corresponding figure was 7.8 percent, translating into 542,000 fewer unemployed workers.
One of the most noteworthy improvements in 2012 occurred in the housing market, which is now associated with both rising sales and median prices. According to the National Association of Realtors, existing-home sales rose 5.9 percent to a seasonally adjusted annual rate of 5.04 million in November from 4.76 million in October. The number of existing home sales is now 14.5 percent higher than a year ago, due primarily to a combination of consistent job growth and extraordinarily low mortgage rates. The national median existing-home price for all housing types was $180,600 in November, up 10.1 percent from November 2011.
Even during the fourth year of economic recovery, massive uncertainty lingers. While fiscal cliff part I is behind us, in front of us is the grisly sequel. Over the next two months, Congress will be wrestling with another set of issues, including whether or not to raise the debt ceiling and to what extent as well as scheduled automatic federal spending cuts.
Taxes have also risen, including in the form of the elimination of the payroll tax cut and an increase in the rate at which dividend income is taxed. With the economy already expanding slowly and with taxes having risen recently, expect the first half of the year to be another period of subpar growth. If Congress fails to appropriately deal with the budget and tax issues now facing it, the first half of the year could be worse than mediocre. On top of that, there is plenty of headline risk emerging from other parts of the world, including Europe where the economy remains in disarray. News from China has been better of late, however.
If Congress is able to successfully navigate the debt ceiling and other issues, the latter part of 2013 could be quite good for the U.S. economy. It is for this reason among others that many financial analysts remain bullish about the longer-term. However, investors should be prepared for a good bit of volatility during the months immediately ahead.
Anirban Basu is Chairman & CEO of Sage Policy Group, Inc., an economic and policy consulting firm in Baltimore, Maryland. Basu is one of the Mid-Atlantic region's most recognizable economists, in part because of his consulting work on behalf of numerous clients, including prominent developers, bankers, brokerage houses, energy suppliers and law firms. On behalf of government agencies and non-profit organizations, Basu has written several high-profile economic development strategies, including co-authoring Baltimore City's economic growth strategy. His opinions do not necessarily reflect the opinions and beliefs of 1st Mariner Bank.