Economy In 2013: Get Used To More Mediocre Growth

Investor's Business Daily

Next year may be when Americans stop waiting for faster economic growth to make everything better again and finally learn to accept the current modest pace as good enough now and good enough later.

Even if lawmakers reach a deal to avoid the fiscal cliff's full impact, tax rates will still go up for many Americans, and government spending will go down.

Incomes, which have seen little growth during the recovery, are unlikely to start shooting higher. Aging consumers haven't regained their lost net worth and aren't ready to load up on new debt.

"It's a very different economy than what we've seen in the last 20 to 30 years," said Steve Blitz, chief economist at ITG Investment Research.

Gross domestic product has expanded at an average rate of just over 2% a year since the recession ended, and many economists expect more of the same in 2013.

That assumes a fiscal cliff deal. But the chances of a pact before year-end are now looking increasingly bleak, and a prolonged standoff could deal another blow to the fragile economy. The U.S. could fall back into recession, the Congressional Budget Office has said.

Even without a "cliff" shock, the National Association for Business Economics, the Organization for Economic Cooperation and Development and the International Monetary Fund all see 2013 growth at or just above 2%.

ITG's Blitz also thinks the U.S. will expand by about 2%, with some positive momentum in housing but not much improvement in consumer spending.

"What the economy is not going to do is accelerate toward the trend path where we were pre-recession," he said. "We're not going to make up that lost ground.

A fiscal cliff deal will unlock some business investment in Q1 but likely won't continue much beyond that. A wider tax reform that encourages more saving and investment could alter the picture, but that seems to be off the table now, he added.

More robust exports could lift industrial investment, which also would boost growth, but Europe and China have issues too.

Blitz sees the U.S. and other rich nations undergoing a major rebalance involving less consumption and more production. But, "these things take time.

'Change Your Benchmark'Other analysts are a bit more upbeat, though they still don't see a booming recovery. Jim O'Sullivan, chief U.S. economist at High Frequency Economics, sees a pickup in the second half of 2013, resulting in full-year growth of about 2.8%.

A resolution to the fiscal cliff will lift some uncertainty from investment decisions, and effects from the Federal Reserve's ramped-up stimulus should show up later in the year.

He also estimates payroll gains will improve slightly to a "solid" 165,000 a month from an average of 151,000 so far this year. That will be better than it seems because fewer new jobs are needed to keep up with the workforce, he explained.

As the population ages, participation in the labor market will continue to fall. So the neutral rate of job growth is now closer to 70,000 a month vs. the old 120,000 to 130,000, he reckons.

With 165,000 jobs a month, spending growth will be OK and wages will gather pace in 2013.

"You have to change your benchmark of what's good and not good," O'Sullivan said.

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