In this edition of Q & A with BCA, we are pleased to offer a recent question posed by long-time BCA client, Mr. X. Making his first appearance in 1962, Mr. X has visited our offices at the end of each year to discuss the outlook for economic and financial markets.
Please find below the third installment of a five-part series recapping our December 2012 meeting.
Mr.X With regard to the U.S. economy, I read a lot of reports about an upturn in housing as a reason to be optimistic about growth over the coming year or two. How important do you think housing will be? Also, what else might contribute to a better year ahead for the economy?
BCA Housing has already started to make a positive contribution to growth for the first year since 2005. Increased residential investment accounted for 16% of the growth in real GDP in the first three quarters of 2012. Meanwhile, the inventory of unsold new houses is at a historic low, and prices have clearly bottomed in the major cities. So in that sense, the picture definitely has improved. At the same time, it is going to be a long road back to normality.
There is still a large overhang of vacant properties that will act as a depressant and this will clear only gradually. Much of the activity in the resale market reflects buying by investors, speculators and overseas residents.The mortgage application purchase index has barely recovered from its lows, reflecting the fact that many would-be buyers do not have the downpayment or good credit score now necessary to qualify for a mortgage loan. The bottom line is that housing will be a positive source of growth in the next several years, but a modest one.
Fortunately, other areas of the economy also are improving. For example, the drag from state and local government cutbacks is moderating as tax revenues revive. State and local government employment has stabilized after its earlier steep contraction.
Finally, the corporate sector should become more comfortable increasing spending and hiring once the fiscal cliff issue fades. Private sector employment is growing, but only at a modest pace. Similarly, capital spending, although moving up, has not been as strong as one might have expected given the strength in profits and the need to sustain productivity. There is lots of scope for improvement.
As we noted earlier, fiscal drag will keep growth near 2% in calendar 2013. However, growth should climb back to around a 3% pace in the second half and in 2014, barring any new shocks. (tweet this!)
Stay tuned for more on this five part Q&A series with Mr. X!