The Economy In 2013

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Can We Survive Another Recession?

Why does the economy feel so fragile even though it continues to be in the midst of a slow but steady expansion? It’s because we did not get the same bounce in growth that has typically followed previous recessions. After the downturn of the mid-1970s and early-1980s, the economy grew at close to 6 percent for two years — erasing all of the economic losses that had occurred. That surge never happened this time; we simply moved into a snail-paced, private sector expansion that has left us wanting more.

Despite Trouble Abroad, U.S. Reaches Tipping Point

Economic weakness in the euro zone is also not helping the U.S. economy. Problems in Europe have caused the value of the dollar to rise slightly, and weak European demand for imports is having a negative effect on the global economy.
The fundamentals of our economy, however, have been trending more favorably in recent months, in spite of what is happening in Europe, Japan, China and the rest of the world. The balance sheet of most U.S. households has improved considerably over the last year, and we appear to have finally reached a tipping point where spending can be more self-sustaining. Employment has picked up after a lull last summer. Wages are stagnant but appear to have bottomed after being cut during the height of the recession.

Deleveraging has accelerated, so overall debt loads have dropped. We are back to the levels of debt we saw in 2003, prior to the run-up during the housing market bubble. That isn’t perfect, but it may be enough to ease credit for many consumers. Net worth has recovered much of the ground that was lost to the recession.

The State Of The Housing Market

Refinancing has increased, reducing mortgage payments and leaving more for consumers to spend each month. Consumer sentiment has picked up and returned to levels not seen since before the recession. Assessments of current economic conditions, the largest determinant of current spending, have generally improved. This has made it easier for consumers to convert refinancing savings into spending for big-ticket purchases, hence the precipitous drop we saw in the savings rate last summer.

Home prices, in particular, have bottomed and are moving up again. With foreclosures and short sales accounting for a smaller proportion of overall sales, home prices have firmed up slightly more than expected. The median price of an existing home has risen approximately 11 percent over the past year, and the S&P/Case-Shiller 10-city home price index is now up almost 1 percent year over year. New home prices have also improved, reflecting less effective competition from distressed sales. Many of the best properties have already been sold, and what is left is either geographically or physically less attractive than new construction.

This, coupled with expectations that home prices will continue to rise, is important because the wealth effects tied to housing are much larger than those tied to equity holdings. It’s easier to repair and upgrade (i.e. landscape) a house that is appreciating than one that is depreciating in value. Rising home values are a game changer because they make it easier for consumers to decide to spend and invest in their homes and, ultimately, sell what they bought at a profit. Housing got us into this mess, and in fits and starts, will be the accelerant that eventually gets us out.

Initial forecasts for housing in 2013 are quite favorable. For example, economists at Goldman Sachs project housing starts to continue to rise, reaching an annual rate of 1 million by the end of 2013 and 1.5 million by the end of 2016. Fannie Mae Chief Economist Doug Duncan is forecasting an 18.4 percent increase in housing starts in 2013 to 888,000, and single-family starts increasing to 611,000. Other housing pundits are forecasting similarly. This is relatively good news for the green industry, which supplies many of the flowers, shrubs, trees and turf for these new homes.

A Possible Recession In 2013

Of course, the economic outlook for 2013 is directly dependent on how our government handled the fiscal cliff that began at the end of last year. Since I am writing this column well before the end of the year, I have no idea whether the fiscal cliff was diverted or not — whether the proverbial can was kicked further down the road or whether actual partisan compromises were made. If we indeed were allowed to go over the cliff, the good news is that we are making big strides in reducing the deficit. The bad news is that we are likely headed for another recession in 2013, though not as large as the last one.

If our legislators instead diverted going over the cliff and continued some of the Bush-era and Obama-era tax cuts and reduced some of the proposed mandatory spending cuts, the short-term effects on the economy will be mitigated, but the long-term implications of our already-too-large national debt still loom ahead of us. Either way, we are going to have to go through some economic pain — we can either endure it now or endure it later.

The need for our government to do something about reducing the long-term deficit is very important, though, because that is what will restore corporate confidence. That is necessary to get companies in the green industry to hire and invest more aggressively.

America also faces pressing questions about how changes to the population are and will be reshaping the economy. The first Baby Boomers turned 65 on Jan. 1, 2011. Since then, more than 10,000 Boomers turn 65 every day until 2030. This change should not come as a surprise. We have long known this crucial shift in population would one day come and could have better prepared for the day. Of course, the U.S. is not alone. Japan, China and Europe are also facing demographic challenges. While the aforementioned fiscal problems demand our attention, we can’t forget to look ahead to the future and see how demographic trends will change where, how and with whom we do business over the next few years. Successful firms in the green industry will pay attention to these trends and position themselves accordingly.

Charlie Hall (charliehall@tamu.edu) is a professor and Ellison Chair in International Floriculture at Texas A&M University.

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