Economic fundamentals stronger in 2013
Last year the United States grew at about 2 percent using preliminary estimates. West Michigan, defined as Allegan, Kent, Ottawa and Muskegon counties, had employment grow by 1.8 percent December 2011 to December 2012. This compares to the current expectation of me and many other economists of a 2013 GDP growth rate of 2-3 percent nationally. For West Michigan, the Seidman Business Confidence Survey shows business leaders expect employment growth of 1.7- 2.3 percent and sales growth of 2.5 percent in 2013.
In other words, the expectations for growth during 2013 are nearly the same as the results seen in 2012.
As we head into 2013, the reason the fundamentals are stronger is the consumer. In the U.S., the consumer is around 70 percent of GDP, so a strengthened consumer stabilizes the economy and allows growth even when there are problems in other areas of the economy. For consumers to be strong, they need good incomes, good net worth and decreased fear of losing their jobs.
Nationally, personal income after taxes and adjusted for inflation increased at 1.5 percent last year. In Michigan, weekly earnings by manufacturing workers decreased 3 percent. However, the decreases seen by manufacturing workers are being offset by increases in other sectors, for instance weekly earnings are up over 6 percent in business and professional services. In addition, at least for the automotive industry, more of the compensation is tied to profit sharing, which masks the true compensation in manufacturing. Therefore, consumer incomes are stabilizing and in many sectors incomes are improving, thereby increasing purchasing power.
Across the U.S., household net worth has returned to pre-recession levels. Through a combination of retiring debt, a growing stock market and a stabilized housing market, households have improved their balance sheets. Since depths of the recession in 2009, household net worth has grown 27 percent and now stands just 3 percent below the housing bubble inflated levels of 2007. In addition, by retiring debt and taking advantage of low interest rates, the debt consumers carry requires only about 11 percent of their after-tax income to service, down from over 14 percent in 2007. Finally, the average consumer continues to live within their means as total household liability growth is comparable to economic growth and revolving debt (credit cards) is growing even slower. Stabilized net worth means greater ability to spend versus save.
Finally, the fear of losing a job is starting to subside. The U.S. job employment has been growing slowly over the last few years, adding around 150,000 jobs a month. Here in West Michigan, employment has been growing faster than the rest of the country since the end of the recession. Even so, at current rates it will be 2016 before West Michigan gets back to the year 2000 employment levels. Finally, the number of those who have been employed less than five weeks is at historically low levels. This means that for those who have a job, the probability of staying employed is relatively high. Even the long-term unemployed number is starting to drop. This means the fear of losing a job is decreasing, which moves people from being savers to consumers.
If the consumer is a bright spot for the economy, why is growth expected to be similar to last year? The primary reason is the federal government. The U.S. government needs to pull back on spending. When a government uses stimulus spending to speed up the economy, the penalty is that it will need to pull back in the future, slowing down the economy. This tradeoff is now happening for the stimulus spending in 2009-2010, and the spending cuts and tax increases projected for 2013 will slow the economy down 1-2 percent compared to the baseline. The government could make things even worse if it scares businesses and consumers into spending less by not providing the certainty needed for future planning. This effect can be clearly seen during the 4th quarter of 2012 when businesses pulled back in order to evaluate the fiscal cliff and health care changes.
The good news is that households in the U.S. are fiscally more sound, which will allow the U.S. to grow even as the government sector pulls back. The result will be growth in line with last year and, if the federal government delivers a realistic plan by summer, maybe an upside surprise at the end of the year.
Paul Isely, Ph.D., is chair of the economics department at Grand Valley State University.