by Calculated Risk on 1/09/2013 05:49:00 PM

Note: Near the beginning of the year, I find it useful to jot down a few thoughts on how I expect the economy to perform. This isn't to test my forecasting skills - some times I learn more when I miss a forecast (As an example, I've spent a significant amount of time looking at the participation rate and demographics since I've been overly pessimistic on the unemployment rate the last couple of years).

Some years I make some big calls. Not this year. Although I think parts of the economy are poised for more growth, I think austerity at the Federal level means another year of sluggish growth.  So my forecasts this year are mostly in line with the consensus (It is more fun being a contrarian - oh well).

Earlier I posted some questions for this year: Ten Economic Questions for 2013. I'll try to add some thoughts, and maybe some predictions for each question.

Note: Here is a review of my 2012 Forecasts

3) Employment: How many payroll jobs will be added in 2013? Will we finally see some pickup over the approximately 2 million private sector job creation rate of 2011 and 2012?

I've been hammering on two key positive themes: 1) the pickup in residential investment (RI), and 2) the end of state and local government layoffs. Both of these will be positive for employment next year (there seems to be a lag between increases in RI and employment).

The following table shows the annual change in State and Local government since 2008. The four years of declining employment appears to be ending.  Note: This doesn't include the benchmark revision to be released in February.  The preliminary revision showed even more government job losses.

State and Local Government, Annual Change in Payroll (000s)
Year	State Government	Local Government	Total
2008	50	108	158
2009	-41	-88	-129
2010	-20	-242	-262
2011	-80	-150	-230
2012	24	-50	-26

The second table shows the change in construction payrolls starting in 2006.

	Construction Jobs (000s)
2006	152
2007	-195
2008	-785
2009	-1,051
2010	-177
2011	69
2012	18

For construction jobs, the preliminary benchmark revision showed an increase in jobs - so 2011 and 2012 will both probably be revised upwards. It is also important to note that construction includes residential, commercial and public. Although residential is picking up (usually the largest category), public construction spending is still declining, and commercial is mostly moving sideways (energy construction is up).

Both state and local government and construction hiring should improve in 2013. Unfortunately there are other employment categories that will be hit by the austerity (especially the increase in payroll taxes). I expect that will offset any gain from construction and local governments.  So my forecast is close to the previous two years, a gain of about 150,000 to 200,000 payroll jobs per month in 2013.

Here are the ten questions for 2013 and a few predictions:
• Question #1 for 2013: US Fiscal Policy
• Question #2 for 2013: Will the U.S. economy grow in 2013?
• Question #3 for 2013: How many payroll jobs will be added in 2013?
• Question #4 for 2013: What will the unemployment rate be in December 2013?
• Question #5 for 2013: Will the inflation rate rise or fall in 2013?
• Question #6 for 2013: What will happen with Monetary Policy and QE3?
• Question #7 for 2013: What will happen with house prices in 2013?
• Question #8 for 2013: Will Housing inventory bottom in 2013?
• Question #9 for 2013: How much will Residential Investment increase?
• Question #10 for 2013: Europe and the Euro