January 29, 2013 Patrick Oliver-Kelley

The US economy in 2013 is looking for a puff of wind to get it moving again. Seemingly every bit of positive economic news is offset by some that is negative: the most visible clouds on the horizon are angry and dark and coming from Washington, President Obama wants Congress to authorize an increase that will allow the government to pay its bills for several years. Republicans, while temporarily waiving a demand that increases in the debt ceiling be matched dollar-for-dollar with spending cuts, still hope to use the issue as leverage in negotiations over the federal budget.

employment

average-gdp

The next potential challenge to the economy could come from sequestration, The housing market will continue to help the US economy grow, but with less umph, as will auto sales. Business is expected to spend some of its cash on new factories and the equipment to go in them. The stock market could potentially help the economy if it continues higher. What is important is that we as a country worry about decline, because only then would we make the changes necessary to belie the gloomy predictions.

progress?

The danger the US shares with all Western democracies is not death but sclerosis. The daunting challenges we face — budgetary pressures, political paralysis, demographic stress — point to slow growth rather than collapse. Muddling through the crisis will mean that these countries stay rich but slowly and steadily drift to the margins of the world. Quarrels over how to divide a smaller pie may spark some political conflict and turmoil but will produce mostly resignation to a less energetic, interesting, and productive future.

Eurozone

Investors around the world have been struck by a bout of optimism. But is the jubilation justified? Several disasters have been avoided: Europe’s politicians are determined to save the single currency; US politicians avoided the fiscal cliff; and Republicans offered to extend the debt ceiling for three months. Second, The ECB promised unlimited bond buying to support the euro; the US Fed pledged to keep interest rates low until US unemployment fell to below 6.5% and the Bank of Japan has shown a new activism. Evidence that growth may be accelerating provides the third reason for optimism.

But the optimism must be put in context. Policies are flawed. Central Bank activism is not a panacea. There is a huge gap between financial market optimism and economic reality. Economies are still in deep trouble. The euro zone economy is to shrink by 0.2% this year. The Euro zone periphery is stuck in a recession with more fiscal austerity ahead and credit tight. The UK economy is in the doldrums. It is hard to see how Europe can return to growth. The reforms are far from complete.

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