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State of the Economy
The economy is starting to rebound, things are starting to look better for businesses - a little bit, at least.

Article


January 09, 2013 By Phillip M. Perry

Overcast with clearing skies. That’s the economic forecast as the nation enters a new year. Drizzly conditions will remain at least for the first half of 2013 as consumers clutch their pocketbooks and commercial activity is constrained. Light should break through the clouds in summer and fall, though, as critical uncertainties are resolved, encouraging corporate hiring, capital investment and consumer spending. In short, things are looking up, but the coming year as a whole is not expected to bring significant relief over 2012.

“We expect the recovery to remain lackluster,” says Sophia Koropeckyj, managing director of industry economics at Moody’s Analytics, a research firm based in West Chester, Pa. “The pace of growth will be too slow to meaningfully bring the unemployment rate below 8 percent.”

The numbers tell the tale. The most common measure of the nation’s economic health is growth in gross domestic product (GDP), the annual total of all goods and services produced in the United States. Moody’s expects GDP to increase by 2.4 percent in 2013. That’s not much of an improvement over the 2.3 percent anticipated for 2012 when figures are finally tallied.

The Moody’s forecast might not seem that bad, given that the GDP increase for an economy in average growth mode is 2.5 percent. But there’s a problem: A nation recovering from a recession needs more robust expansion.

“By most measures, this recovery is among the weakest in the past 50 years,” says Koropeckyj, who points to a number of factors holding back the recovery. “Fiscal restraint on the local and national level, weaker global demand, a housing market that has hit bottom but has a long way to go to become healthy, and weak income growth are all constraining a stronger pickup in employment.” Other factors are the weakening economies of China and Europe - both important markets for U.S. exports.

The weight of those sticking points combines to dampen the public mood.

“Consumer confidence is still at a level consistent with a recession,” says Scott Hoyt, senior director of consumer economics for Moody’s. “Consumers remain concerned about economic conditions. There is still … weak growth in wages, volatile stocks and high gasoline prices. Th ere are a lot of things to keep consumers on edge.”

While consumer confidence ticked upward in early fall, public jitters will only be reinforced by the major weight of a constraining federal fiscal policy. Consumers will be impacted in particular by the anticipated terminations of two initiatives: the social security payroll tax holiday and extended unemployment insurance benefits. Reduced federal spending, by eliminating some jobs, will also have an indirect, but significant, effect on consumers.

Given these depressants, Moody’s expects the nation to muddle along through the early months of 2013 as the fiscal policy debate heats up, with improving performance expected in the summer.

Corporate Profits

Though the economy remains troubled, many large corporations are thriving. Indeed, they have been stockpiling cash to position themselves for a fresh round of capital and labor investment when the market rebounds.

“Businesses are in excellent financial health; their costs are down and they have become highly competitive and profitable,” says Koropeckyj. “Employers have little slack in their labor forces so layoffs have declined dramatically.”

Reports from the field reinforce this assessment.

“Of the one thousand or so companies that we watch closely, sales generally are strong,” says Michael Smeltzer, director of the Manufacturers Association of South Central Pennsylvania, a trade group whose members employ some 200,000 workers. What remains weak, though, is “backlog,” sales booked for future delivery.

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