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What’s Standing in the Way of the Next Bull Run

Find the top five questions that could mean the difference between a boom or bust for 2013.


Stocks were mostly lower Monday ahead of a widely-anticipated evening speech by Federal Reserve Chairman Ben Bernanke, and as a result of renewed fears of government shutdown as a bargaining chip in the debt-ceiling debate.

Substantial weakness in Apple (NASDAQ:AAPL) shares over reports that it had cut iPhone parts orders due to softening demand also depressed the tech sector and the Nasdaq overall. Tech and telecom were the groups shedding the most value, while consumer staples and healthcare outperformed. Crude oil and gold were both higher.

Looking out across the rest of the year, a lot of the success of individual stocks is going to depend on the success of the U.S. and world economy. To be sure, individual companies’ innovation, pricing and expense control will also be vital. But it’s also valuable to understand the macroeconomic environment so that you know how to fit the individual corporate pieces into a bigger puzzle.

To that end, I want to relay a good piece of research that I ran across this weekend. It’s a look by Goldman Sachs (NYSE:GS) strategist Jan Hatzius at the 10 most important questions for the U.S. economy in 2013. I’ll be doing this as a two-part series, so we’ll look at the first five questions looming over the domestic economy in this part. (View the second part of this series here.)

Overall, Goldman sees another year of slow but improving growth, low inflation and easy monetary policy. While that sounds unappealing, it actually represents decent progress five years after the century’s worst credit crisis. These answers are all either a paraphrasing of, or quotes from, the Hatzius remarks.

1. Will the 2013 tax hike tip the economy back into recession?

No. To be sure, it will likely deal a heavy blow to household finances, and we therefore expect consumer spending to be weak this year. Add expiration of the payroll tax cut (a hit of $126 billion), the expiration of the Bush-tax cuts for families earning more than $450,000 ($50 billion), and the increase in taxes to finance the Affordable Care Act ($24 billion), it amounts to $200 billion, or 1.6% of disposable personal income. This could push real income growth in the first quarter into negative year-on-year territory, something that has never happened without a recession, but there is enough spending growth expected in the second half to prevent the outright contraction.

2. Will growth pick up in the second half?

Yes. This forecast is based on Goldman’s assumption that the drag from fiscal cuts and higher taxes diminishes in the second half of 2013. Expect a boost in private sector financial balance sheets — i.e., an improvement in spending due to improved savings and credit scores — to help real GDP up to a 2.5% annualized rate, and then 3% in 2014.  Essentially, Hatzius expects a positive impulse from the improvement in the private sector to outweigh the negative impulse from public-sector retrenchment. It suggests that the private sector boost will gradually gain the upper hand over the public sector drag, and this will push growth from a below-trend pace in early 2013 to an above-trend pace in 2014 and beyond.

The biggest risk to this view is that the fiscal drag will be even more damaging to growth than assumed. Another risk is that the fiscal drag itself will be bigger if the Pentagon spending sequester is not prevented in March. If the sequester does take effect on schedule, the drag from fiscal policy on real GDP growth would pick up further in coming quarters and GDP growth would be reduced by as much as 1%.

3. Will capital spending growth accelerate?

Yes. Goldman expects a pickup from around zero in the second half of 2012 to about 6% in 2013 on a Q4/Q4 basis. This would contribute 0.6% to real GDP growth, and offset most of the likely slowdown in consumer spending growth.

The forecast is based on the assumption that the sharp slowdown in capital spending growth in the second half of 2012 was at least partly due to a policy uncertainty shock, as firms pulled in their horns in advance of the fiscal cliff. The analysts expect these effects to unwind, particularly as the fundamentals for capital spending remain quite favorable.  There are in fact some indications that capital spending already started to recover at the very end of 2012, Goldman observes.

4. Will the housing market continue to recover?

Yes. The fundamentals for housing activity point to further large gains in the next couple of years. The “demographic demand” for homes — i.e. the sum of household formation and the demolitions of existing home — will boost housing starts. Although starts have recovered from 500,000 (annualized) in 2009 to 850,000 at the end of 2012, they remain far below Goldman estimates of demographic demand. This stands at 1.3 million now, and the analysts expect it to pick up to 1.6 million over the next couple of years as household formation normalizes further.

[This keeps with my outlook, as I’ve been bullish on homebuilders and related stocks for a while.]

5. Will the unemployment rate continue to fall quickly?

No. Although GDP growth is likely to be similar to 2011 and 2012, Goldman expects the unemployment rate to fall much more slowly, from 7.8% now to 7.6% by the end of 2013.

The main reason is that the analysts expect labor force participation to stabilize after three years of significant declines, not because they see employment growth slowing to a meaningful degree. In that sense, the reason for the slower decline in the unemployment rate is a “good” one, although more rapid declines in unemployment on the back of more rapid employment growth would, of course, be better.


I’ll follow up with the remaining five questions that are top-of-mind when it comes to the U.S. economy.

InvestorPlace advisor Jon Markman operates the investment firm Markman Capital Insight. He also writes a daily swing trading newsletter, Trader’s Advantage which aims to capture profits of 15% to 40% and often as much at 100% to 200% in less than 90 days. 

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