Economic Insights - February 2013

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In spite of bad fiscal policy and an abysmal "labor participation rate," the U.S. economy continues to muddle through. Real GDP grew 2 percent in 2011, and despite a farm drought and Super Storm Sandy, it was nearly the same for 2012.

For 2013, we expect slightly faster real GDP growth of about 2.75 percent. And some of that apparent strengthening will be due to replenishment of farm inventories after the drought, as well as rebuilding from Sandy; both factors are temporary.

Monetary policy is loose and there is a natural, free-market recovery in housing underway. Nominal GDP is up at a 4.2 percent annual rate the past year.

Meanwhile, the conventional wisdom, which has expected a double-dip recession for the past 3½ years, remains fearful. Why are we still optimistic that the medium-term economy will keep inching forward? Just consider the facts:

Consumers finished 2012 with neither a bang nor a whimper. Instead, it was more "steady growth." Retail sales beat consensus expectations in December, with auto sales up 1.6 percent for the month and up 7.6 percent for the year.

Excluding autos, sales were up 0.3 percent in December and up 4.1 percent in 2012. "Core" sales, which exclude autos, building materials, and gasoline, were up 0.6 percent in December and 4.5 percent in 2012.

For 2013, we expect a modest acceleration in consumer spending growth despite the recent increase in taxes and a transition away from growth in auto sales and toward other areas, like furniture, appliances, and building materials.

Consumer spending should accelerate in 2013 because of continued growth in jobs, hours, and wages. In addition, households have the lowest share of their after-tax incomes since the early 1980s committed to making recurring monthly payments, such as mortgages, rent, car loans, credit cards, and student loans.

On the other hand, after growing strongly for 3½ years, auto sales are now approaching 15.5 million per year, which is the sustainable level based on "scrappage" and the growth in the driving-age population. That's why auto sales will grow slowly in 2013.

Meanwhile, the upturn in home construction, which we'll discuss later, sets the stage for growth in sales of appliances, electronics, and...

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