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Sunday, December 22, 2013

Review: Ten Economic Questions for 2013

by Calculated Risk on 12/22/2013 12:38:00 PM

Next week I'll post some economic questions for 2014, but first here is a review of my Ten Economic Questions for 2013.

After posting the list, I followed up with a discussion of each question. The goal was to provide an overview of what I was expecting in 2013 (I don't have a crystal ball, but I think it helps to outline what I think will happen - and understand when I was wrong).

I've linked to my posts from the beginning of the year, with a brief excerpt and a few comments:

10) Question #10 for 2013: Europe and the Euro

Even though I've been pessimistic on Europe (In 2011, I correctly argued that the eurozone was heading into recession), I was less pessimistic than many others. Each of the last two years, I argued the eurozone would stay together ... My guess is the eurozone makes it through another year without losing any countries or a serious collapse. Obviously several countries are near the edge, and the key will be to return to expansion soon.

Note: unless the eurozone "implodes", I don't think Europe poses a large downside risk to the US.
Correct: The Eurozone survived another year.  The good news is it is now obvious to almost everyone that "austerity" alone failed.  The bad news is that many policymakers remain blind to the obvious. 

Even with bad policies, eventually the European economies will start to grow again.   And it appears that is starting to happen now.  Of course many problems remain.

9) Question #9 for 2013: How much will Residential Investment increase?
New home sales will still be competing with distressed sales (short sales and foreclosures) in many areas in 2013 - and probably even more foreclosures in some judicial states. Also I've heard some builders might be land constrained in 2013 (not enough finished lots in the pipeline). Both of these factors could slow the growth of residential investment, but I expect another solid year of growth.

... I expect growth for new home sales and housing starts in the 20% to 25% range in 2013 compared to 2012.
Forecast was a little high: We have start data through November, and starts this year are up 19% over the same period in 2012.  New home sales are up 15% through the first ten months of 2013 compared to the same period in 2012.  This is a little below my forecast, but another solid year for housing.

8) Question #8 for 2013: Will Housing inventory bottom in 2013?
If prices increase enough then some of the potential sellers will come off the fence, and some of these underwater homeowners will be able to sell. It might be enough for inventory to bottom in 2013.

Right now my guess is active inventory will bottom in 2013, probably in January. At the least, the rate of year-over-year inventory decline will slow sharply.
Correct: It appears inventory bottomed early in 2013, and inventory was up 5% year-over-year in November according to the NAR.  Inventory is still low, but this increase in inventory should slow the rate of house price increases.

7) Question #7 for 2013: What will happen with house prices in 2013?
Calling the bottom for house prices in 2012 now appears correct.

[E]ven though I expect inventories to be low this year, I think we will see more inventory come on the market in 2013 than 2012, as sellers who were waiting for a better market list their homes, and as some "underwater" homeowner (those who owe more than their homes are worth) finally can sell without taking a loss.

Also I expect more foreclosure in some judicial states, and I think the price momentum in Phoenix and other "bounce back" areas will slow.

All of these factors suggest further prices increases in 2013, but at a slower rate than in 2012.
Forecast was too low: The Case-Shiller Comp 20 and National indexes both increased about 7% in 2012.  The seasonally adjusted Case-Shiller Comp 20 index was up 13.3% year-over-year in September, and the National Index is up 11% through Q3 . Other indexes show less appreciation - and I expect price increases to slow - but my initial prediction for house prices this year was too low.

6) Question #6 for 2013: What will happen with Monetary Policy and QE3?
I expect the FOMC will review their purchases at each meeting just like they used to review the Fed Funds rate. We might see some adjustments during the year, but currently I expect the Fed to purchase securities at about the same level all year.
Correct: The Fed kept their purchases steady all year, and will start to reduce QE asset purchases in January (announced at the meeting last week).

5) Question #5 for 2013: Will the inflation rate rise or fall in 2013?
I still expect inflation to be near the Fed's target. With high unemployment and low resource utilization, I don't see inflation as a threat in 2013.
Forecast was a little too high: Inflation has been below the Fed's target all year. This is a significant issue for the Fed, and it appears my inflation forecast was a little high.

4) Question #4 for 2013: What will the unemployment rate be in December 2013?
My guess is the participation rate will remain around 63.6% in 2013, and with sluggish employment growth, the unemployment rate will be in the mid-to-high 7% range in December 2013 (little changed from the current rate).
Forecast was too high: The unemployment rate was at 7.0% in November.  I was too pessimistic on the unemployment rate because the participation rate has continued to decline.

3) Question #3 for 2013: How many payroll jobs will be added in 2013?
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.
Correct: Through November 2013, the economy has added an average of 173 thousand jobs per month - about as expected.

2) Question #2 for 2013: Will the U.S. economy grow in 2013?
[R]ight now it appears the drag from austerity will probably offset the pickup in the private sector - and we can expect another year of sluggish growth in 2013 probably in the 2% range again.
Correct: It now looks like GDP will increase in the 2.2% to 2.4% range for 2013.

1) Question #1 for 2013: US Fiscal Policy
[T]the House will fold their [early 2013] losing hand [on the debt ceiling] soon. ...

Although the negotiations on the "sequester" will be tough, I suspect something will be worked out (remember the goal is to limit the amount of austerity in 2013). The issue that might blow up is the “continuing resolution", and that might mean a partial shut down of the government. This wouldn't be catastrophic (like the "debt ceiling"), but it would still cause problems for the economy and is a key downside risk.

And a final prediction: If we just stay on the current path ... I think the deficit will decline faster than most people expect over the next few years. Eventually the deficit will start to increase again due to rising health care costs (this needs further attention), but that isn't a short term emergency.
Mostly Correct: The House did fold early this year, but I was wrong about the sequester (bad policy).  Unfortunately I was also correct about the government shutdown.

And I was definitely correct about the deficit decreasing faster than most people expected.  This has really surprised some policymakers (who unfortunately are still not paying attention).

Luckily 2014 is an election year, and with the recent budget agreement, I don't expect the House to be a huge downside risk next year (assuming Congress "pays the bills").

Overall 2013 unfolded about as expected.  I'm expecting Stronger Economic Growth in 2014, and longer term, the future's so bright ...