Economy Poised to Nudge Ahead in 2013

As 2012 comes to a close, the U.S. economy is also turning a page: The recovery is over. It looks like 2013 will be the start of a more normal, though hardly robust, period of growth.

For Americans struggling in the still-slow economy, that is both good news and bad. The risk of another recession is diminishing, at least if leaders in Washington can steer clear of the "fiscal cliff." But so are the prospects for a period of rapid growth that brings down the unemployment rate and helps the economy make up the ground lost in the recession.

Technically, the recovery ended in late 2011 when economic output, adjusted for inflation, returned to its prerecession peak. But on a per-capita basis, gross domestic product still hasn't rebounded to its 2007 high, and by most other measures the economy has remained mired in its postrecession doldrums. For more than three years after the recession ended in June, 2009, unemployment remained high, the housing market remained depressed, and every economic speed bump brought renewed fears of a drop back into recession.

That is poised to change in 2013. Home prices are finally rising again in much of the country, and construction activity is slowly picking up. Job growth has stabilized at about 150,000 jobs per month and unemployment, though still elevated, dropped below 8% in September and has continued to fall. If current trends continue, per capita output will surpass its prior peak sometime next year.

The economy is far from fully healed. The combined net worth of American households remains 12% below its pre-recession peak, after adjusting for inflation.

Incomes, too, have yet to fully recover. And most significantly, U.S. businesses still employ 3.3 million fewer workers than before the financial crisis, a gap the economy won't fill next year under even the rosiest of plausible job-growth scenarios.

In the immediate aftermath of the financial crisis, the economy was supported by just one or two sectors—first government during the recession, then manufacturing in the early phase of recovery. Lately, as households and businesses have begun to dig out of debt and rebuild their battered finances, more sectors of the economy are contributing. The last to show real gains, housing, has emerged as a driver of growth this year.

That kind of broad-based revival gives the economy a cushion it lacked earlier in the cycle. When exports slowed last spring, consumers picked up the slack. Now consumers are growing more cautious, but housing remains strong. That means the economy is in less danger of tumbling back into recession.

The wild card is the fiscal cliff, the billions in dollars in tax increases and government spending cuts set to take effect starting early next year. Experts including Federal Reserve Chairman Ben Bernanke and the nonpartisan Congressional Budget Office have said that if there's no deal to avoid the cliff, the U.S. will fall into a recession in the new year.

But even with that looming threat, economists surveyed by The Wall Street Journal put the odds of a recession next year at just 24%. Not coincidentally, those odds are closely aligned with the odds—26%—that the economists put on a standoff that allows the tax and spending policies to take effect. Get past the cliff, and most economists expect reasonably solid growth.

"The economy is waiting to grow," said Ram Bhagavatula of Combinatorics Capital. "Just give us some normalcy. I don't see any piece of the economy that should be subtracting next year."

But while a recession may be unlikely, so is a period of breakout growth. Economists estimate the chances of greater than 3% growth next year are exactly the same 24% as the chances of another recession. On average they expect growth of 2.3% in 2013, a bit better than the 1.9% growth they think the U.S. achieved this year, but not enough to be of much help for the nation's 12 million job seekers. The economists surveyed expect the unemployment rate to tick down only to 7.5% by the end of 2013, from 7.7% today. Even by the end of 2014, economists still expect unemployment of 7%.

The slow pace of growth is unusual after a recession. After past downturns, the economy went through a period of rapid growth until it returned to its prior path. That hasn't happened this time: While the economy is nearing or has surpassed its prior peak by many measures, it hasn't come close to catching up to where it would have been if the recession had never happened. Economists are increasingly skeptical that the U.S. will soon experience such a growth spurt.

"It's very disappointing to say that 2% growth is where we are, but it's going to be hard to generate anything stronger," said John Silvia of Wells Fargo Securities. "Too many people are waiting for a solution to the European situation and the fiscal cliff, and thinking that's enough. You've got a long workout for the U.S. economy."

A period of stability would be welcome news for executives weary of economic projections that seesaw between imminent recession and breakout growth. But for all the complaints about uncertainty, the new normal that looks set to emerge post-crisis—modest growth amid still-high unemployment—may not make 2013 much to celebrate.

Source:   Ben Casselman and Phil Izzo, Wall Street Journal
  
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