Headwinds vs. tailwinds

Wednesday January 30, 2013

It’s been less than a month since Congress inked a budget deal that would avert the proverbial fiscal cliff that was looming at the end of 2012, and already Americans are feeling the effects of the temporary payroll tax cut that was allowed to expire.

The Consumer Confidence Index, which had declined in December (because of the uncertainty created by Washington at the end of the year), fell further in January to 58.6 from 66.7 in December.

"Consumers are more pessimistic about the economic outlook and, in particular, their financial situation," Lynn Franco, director of economic indicators at The Conference Board, said in Tuesday’s release. "The increase in the payroll tax has undoubtedly dampened consumers’ spirits and it may take a while for confidence to rebound and consumers to recover from their initial paycheck shock."

Allowing the Social Security tax cut to expire was a necessary part of the fiscal cliff deal, but it effectively reduces Americans’ take-home pay by about $1,000 for a typical household making $50,000 a year. Add to this the fact that hourly wages rose just 2.1 percent last year, only slightly above consumer inflation of 1.7 percent, and you have a net loss in discretionary spending for most Americans.

Considering that consumer spending accounts for about 70 percent of economic activity in the United States, this is cause for concern.

More bad news could come on Friday when the U.S. Department of Labor releases unemployment figures for January. Most economists expect the government to report about 150,000 new jobs for January. That’s certainly better than the hemorrhaging (thanks to the previous administration) we saw at the start of President Obama’s first term, but it’s still far from the 250,000 per month minimum job gain needed to lower the unemployment rate.

Despite these bearish trends, however, many analysts are somewhat bullish about the future. CBS MoneyWatch points to a number of factors both here and abroad that are creating an economic tailwind. On the international front, Europe is no longer on the precipice of disaster, the much-feared hard landing in China never came to fruition, and Japanese officials have started to address the country’s multi-decade economic stagnation.

Here at home several key areas of the economy -- housing, auto sales and banking -- are simultaneously driving growth for the first time since the recession ended three-and-a-half years ago, which means the strength is more broadly based, according to an Associated Press report.

"There is some underlying momentum," Paul Edelstein, U.S. economist at IHS Global Insight, told the AP. "It’s not as strong as we would like, but it’s there and it’s building."

Edelstein and other analysts believe that by the end of this year the tailwinds will succeed in boosting growth and fueling a more robust economy in 2014.

As for those pesky headwinds, most economists expect the higher Social Security tax to bite hardest in the first three months of the year. But after Americans adjust to the sudden cut, its impact should lesson over time, AP reports.

The challenges of unemployment and stagnant wages may be a little trickier because they’re being weighed down, in large part, by politics. The ongoing budget fights in Washington continue to create a high level of uncertainty that has discouraged businesses from hiring. And as long as unemployment remains high many businesses won’t feel pressured into raising salaries for existing workers.

If federal budget issues can be resolved, the economy could start to accelerate. Analysts forecast only modest growth this year of about 2 percent, but they think growth will strengthen as the year goes on, AP reports.

Diane Swonk, chief economist at Mesirow Financial, expects housing and other tailwinds to accelerate growth this year -- as long as budget "shenanigans" don’t dampen consumer and business confidence as they did in 2011.

"Could we get 3.5 percent growth by the end of this year? If we can get over this budget stuff, absolutely," she told the AP.

So if Washington would just do its job and get out of the way, then our economic future looks pretty good.


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