Latest Forecast Analysis
OLD DOMINION UNIVERSITY
ECONOMIC FORECASTING PROJECT
COLLEGE OF BUSINESS AND PUBLIC ADMINISTRATION
January 30, 2013
2013 Annual National Economic Forecast
(All forecasted changes are relative to calendar year 2012)
Real GDP (2.10%)
Real GDP is projected to grow at 2.10% in 2013, which is slightly slower than in 2012 and below our 30-year average growth rate of 2.7%. This slower-than-average growth is, for the most part, the result of the continuing adjustments in household balance sheets and financial markets in the wake of the 'Great Recession.'
Real disposable income has improved since the end of the recession, but it has not rebounded at a pace that is commensurate with past recessions. This is largely due to the structural adjustments that continue to occur in labor markets, particularly in the construction and financial services sectors.
Household deleveraging, which began in 2008, remained steady in 2012. However, household debt, particularly mortgage debt, remains well above the levels of a decade ago. It is unlikely to expect consumer spending to increase at the rate that would be necessary for a more rapid (above average) economic recovery until the ratio of debt-to-income begins to approach its historical norm.
Based on after-tax profits and cash-on-hand, firms ended 2012 in their best financial position since the recession's end. Bank delinquency rates, with the exception of mortgages, have returned to pre-recession levels and the tightening of credit standards slowed considerably in the second-half of last year. Combined with interest rates that are at or near all-time lows, the demand for mortgages, automobiles, and commercial and industrial loans all increased in the latter-half of last year. Once confident that increases in consumer spending are sustainable, firms are well-positioned to increase investment spending and accelerate the recovery.
A worldwide economic slowdown that began in the middle of 2012 is expected to continue at least for the first half of 2013. This reduced the demand for US produced goods and services and should slow the rate of exports next year. Import growth is also expected to slow in 2013 as growth in the US economy slows. The deteriorating economic conditions of our major trading partners, the trade-weighted appreciation of the dollar late in the year, and the ongoing concerns within the Eurozone suggest that net exports will likely be a drag on US growth in 2013, predominately early in the year.
Policy uncertainty, primarily from the Federal government in the form of the "fiscal cliff" and debt limit negotiations, negatively impacted the economy in 2012. The American Taxpayer Relief Act of 2012 (the "fiscal cliff" deal) resulted in short-term fiscal tightening that will contribute to slower job growth in 2013 via expiration of the payroll tax reduction. In addition, uncertainty concerning the country's debt limit and solutions to our longer-term fiscal imbalances remains a serious barrier to restoring consumer and business confidence.
Payroll Employment (1.15%)
We forecast the national economy to add more than 1.5 million jobs in 2013, which represents a 1.15% increase over the 134 million jobs in place at the end of 2012. Labor market conditions remain fragile and job growth since the recession's end has remained well below levels experienced during previous recoveries. The expiration of the payroll tax reduction, continued structural adjustments, and policy uncertainty are the driving factors that should contribute to slower employment growth in 2013.
Unemployment Rate (7.6%)
The unemployment rate is expected to decrease in 2013, but will continue to remain well above its historical average of 5.7% over the past twenty-five years. Long-term unemployment and the U6 unemployment rate, which measures individuals who have dropped out of the labor force over the past 12 months and individuals who are employed part-time due to the economy, both began to improve for the first time since the recession in the second-half of 2012. Thus, while labor markets conditions are continuing to improve, the aforementioned factors contributing to slower job growth in 2013 will delay a more rapid recovery in the unemployment rate.
Consumer Price Index-U (1.73%)
Inflation is forecasted to remain slightly below the Federal Reserve's target rate of 2% in the near-term. Excess capacity in the economy, low capacity utilization, and a slowing worldwide demand for US goods and services should keep inflation risks low.
Three-Month Treasury Bill Rate (Year Avg. 0.20%)
Ten-Year Treasury Note Rate (Year Avg. 1.95%)
30-Year Conventional Mortgage Rate (Year Avg. 3.80%)
The Federal Reserve has publicly announced that monetary policy will remain "highly accommodative" as long as the unemployment rate remains above 6.5% and inflation expectations remain well-anchored. Moreover, a third round of quantitative easing began in September 2012 in which the Federal Reserve committed to purchasing $40 billion a month in mortgage-backed securities and $45 billion in other longer-term Treasury securities. We expect both short-term and long-term interest rates to remain near their 2012 levels as long as Federal Reserve policy remains unchanged.