Spring Swoon Sequel No Reason for Economic Growth ScareRich Miller and Shobhana Chandra
Like a horror movie with multiple sequels, The Economy: Spring Swoon IV probably won’t be as surprising or as scary as its predecessors.
Repeating the pattern of the past three years, the U.S. is cooling off as the weather turns warmer, with job growth slowing, retail sales falling and manufacturing output dropping after gross domestic product surged an estimated 3 percent in the first quarter. What’s different this time? The slowdown isn’t unexpected: Economists surveyed by Bloomberg have had it penciled into their forecasts for at least a month.
The deceleration is coming in response to an identifiable cause -- the biggest federal-budget tightening in more than 60 years -- rather than inchoate fears about a break-up among countries that use the euro, a Treasury-debt default or a hard landing for China’s economy. And the U.S. looks better prepared to withstand it, thanks in part to a rebounding housing market.
“There definitely has been a slowdown in the past month,” said Russ Koesterich, global chief investment strategist at New York-based BlackRock Inc., the world’s largest money manager with $3.8 trillion in assets. “I don’t think it is going to be as dramatic or necessarily as frightening as some of the ones we had back in ’10, ’11, and ’12, which were really exacerbated by a lot of geopolitical issues.”
That’s good news for the stock market. While shares may fall in response to weaker data, a sell-off “would represent a potentially attractive buying opportunity,” said Jerry Webman, chief economist at New York-based OppenheimerFunds Inc., which has $208 billion in assets under management.
Koesterich agrees. He sees stocks suffering a “mild correction” of 5 percent to 10 percent during the next few months before resuming their advance.
“The market can end the year higher than it is today, but we’re probably going to see some lower prices first,” with the Standard & Poor’s 500 Index over 1,600 by the close of 2013, he said. The stock gauge was 1,555.25 on April 19, down 2.1 percent for the week but up 9 percent this year.
News from the Labor Department on April 5 kicked off the market chatter about a swoon. Employers in March added the fewest workers in nine months, increasing payrolls by just 88,000. That was followed by an April 12 Commerce Department release showing that retail sales dropped last month by the most since June and a Federal Reserve report on April 16 that factory output fell 0.1 percent in March.
William C. Dudley, president of the Federal Reserve Bank of New York, said the slump in payroll growth makes him wary of declaring that the economy is on solid-enough ground for the central bank to scale back its stimulus.
“I’d note that we saw similar slowdowns in job creation in 2011 and 2012,” he told the Staten Island Chamber of Commerce on April 16. “This, along with the large amount of fiscal restraint hitting the economy now, makes me more cautious.”
The Federal Open Market Committee in March reiterated its plan to purchase $85 billion in bonds every month and keep buying securities until the outlook for the U.S. labor market improves “substantially.” It also pledged to keep interest rates near zero as long as unemployment is above 6.5 percent and inflation isn’t forecast to exceed 2.5 percent.
The unemployment rate was 7.6 percent in March, and the Fed’s preferred price measure -- the personal consumption expenditures price index -- rose 1.3 percent in February from a year ago.
The drag on the economy from tax increases and spending cuts will amount to 1.5 percent of gross domestic product this year, the most since 1950, when military outlays were reduced after World War II, said Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania.
That estimate includes the effect of $85 billion in automatic across-the-board government budget cuts, known as sequestration, that began on March 1. The Congressional Budget Office has estimated those reductions alone will reduce GDP this year by 0.6 percentage point.
Zandi sees growth easing to an annual pace of 1.5 percent in the second quarter from 3.4 percent in the first before picking up to 3 percent in the final three months of 2013.
“It felt scarier a year ago, two years ago,” he said. “The threats we were facing felt more existential and were impossible to handicap,” he added, referring to such risks as Greece abandoning the euro and a U.S. debt default.
Those dangers have diminished following action by policy makers in Europe and the U.S., the International Monetary Fund said in its World Economic Outlook released April 16.
The issue facing investors now is a “bit more mundane,” Koesterich said: How much will growth decelerate in response to the fiscal drag? That question is “manageable and more understandable,” he said.
Economists surveyed by Bloomberg have been forecasting for months that the economy would take a hit from budget belt-tightening. Initially, they foresaw the impact in the first quarter, after payroll taxes were increased by 2 percentage points at the start of the year.
Now, they see the slackening occurring this quarter, after marking up their growth estimates for the first three months of 2013. GDP will climb at an annualized rate of 1.5 percent from April through June, compared with 3 percent in the first quarter, according to the median forecast in a Bloomberg survey of 69 economists from April 5 to April 9. Growth in the second half of 2013 will average 2.4 percent.
The federal budget tightening “isn’t a shock,” said Gus Faucher, a senior economist for PNC Financial Services Group Inc. in Pittsburgh. “Businesses are prepared for it and have taken steps, and government employees know there will be furloughs.”
The economy also is better placed to weather the fiscal fallout, according to Roberto Perli, a Washington-based managing director at International Strategy & Investment Group and a former Fed economist.
“The starting point right now is a lot stronger than it was in each of the past three years,” he said. “In particular, housing is very significant.”
New home construction rose 7 percent in March to a 1.04 million annual rate, the highest level in almost five years, Commerce Department data showed.
The increased building is unfolding as property values firm. The median price of an existing house climbed 11.6 percent to $173,600 in the 12 months ended February, the biggest year-over-year advance since November 2005, according to figures from the National Association of Realtors.
“Although the pace of the housing-market recovery is gaining momentum, it is important to keep in mind that we are still in the early stages of the recovery,” Jeffrey Mezger, chief executive officer of the Los Angeles-based builder KB Home said on a March 21 earnings call.
Automakers also look for further gains after a strong start to the year. Cars and light-duty trucks sold at an average 15.3 million annualized rate in the first quarter, the most since the same period in 2008, according to data from Ward’s Automotive Group.
While the increase in the payroll tax and cuts in government spending are a concern, “everything else seems to be pretty positive,” Kurt McNeil, vice president of U.S. sales and service at Detroit-based General Motors Co., said on an April 2 conference call. McNeil said gains in employment and housing, a thawing in consumer credit and the increase in stock prices outweighed the negatives.
Lower energy costs are another plus, thanks to stepped-up U.S. production of natural gas and oil. Consumers spent 2.7 percent of their household income on home-energy bills last year, the lowest share in 10 years, according to the U.S. Energy Information Administration in Washington.
The EIA forecast on April 9 that consumers will pay an average 6 cents a gallon less for gasoline this summer than a year ago. Regular-grade gasoline will average $3.63 from April through September, down from $3.69 a gallon in 2012, the statistical arm of the Energy Department said.
February could end up being the high point for prices this year, said Michael Green, a spokesman for motoring group AAA. A gallon of regular, unleaded gasoline at the pump averaged $3.51 on April 18, down 28 cents from February’s high and 38 cents from a year ago.
“It’s providing significant savings for families,” Green said.
It’s also helping offset some of the pinch on households from higher payroll taxes, added Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York.
The Fed also provides support by keeping its asset-buying program open-ended, so investors don’t keep expecting the central bank to withdraw stimulus, Faucher said.
“The Fed has learned their lesson” by tying the end of its purchases to an economic objective rather than to a calendar date, he said.
“We’re swooning, and it’s largely because of the tax increases and spending cuts,” Zandi said. As that drag fades going into next year, growth will accelerate to close to 4 percent and “the economy will have finally emerged from the long shadow of the Great Recession.”