Decision makers running businesses in 2013 possess a cautious outlook in the first quarter of 2013, according to Wells Fargo economists.
This economic team expects a sluggish real Gross Domestic Product of 1.5% to start 2013. This is up from 1% in the fourth quarter of 2012 but below the 2.2% average of the last year or so.
John Silvia, chief economist with Wells Fargo, says homebuilding and the auto industry are the two positive engines likely to pull the economy forward in 2013.
“Homebuilding will likely strengthen, even as overall economic growth weakens. Homebuilders are now positioned for a more normal recovery. The improved outlook stems from a variety of factors, most specifically a reduction in the amount of effective competition that the overhang of foreclosures presents to new construction,” Silvia said.
He expects personal income growth to remain tepid amid a 2.3% inflation rate, up from 2.2% in 2012.
Corporate profit growth is also expected to be slimmer as companies face higher operating costs related to tax changes and health care costs.
Businesses have pulled back on hiring and spending outlays ahead of the fiscal cliff and tried to use up inventory. This is not expected to continue if the fiscal cliff issue is resolved by the start of 2013.
Mark Vitner, senior U.S. economist with Wells Fargo, said higher taxes are a reality for the future, at the lower and higher ends of the income spectrums. He said adjusting to the higher taxes will mean a sluggish start to the new year.
Social Security withholding is going up Jan. 1 and this will reduce the median household income by $1,000 per year.
“The adjustment to the higher payroll tax will take a toll on consumer spending, as we expect it to hold real personal consumption growth to just 1.3 % in 2013. Most of the weakness likely will be at the start of the year,” Vitner said.
At the higher income levels – $250,000 and up – the expiration of the Bush-era tax cuts will likely also curtail spending. Vitner said this group has benefited of late from higher home prices and a rise in the stock market, but will face a tax bite in the next few years.
He agreed the consumer spending could regain some momentum by the second quarter of 2013. Vitner sees some pent-up demand for motor vehicles, which will be lifted by some replacement from vehicles lost in Hurricane Sandy.
Consumer confidence improved significantly in the third quarter, even with adverse shocks from the weather and financial markets.
“We expect consumer spending to pick up modestly during the second half of 2013 and grow 1.6% in 2014,” Vitner said.
World consumption will remain constrained in 2013 as a large number of individuals in developed countries adjust to the new normal of fiscal restraint, according to global economist Jay Bryson.
He said on a global scale consumers in the developing world will be the key to worldwide consumer demand.
“This means that, again, consumers in the developed world will need to de-leverage and adjust to the new environment,” Bryson said. “And within this new environment, developing country governments will have a lot to say about policy decisions to help consumer demand plow ahead.”
This is especially true for Chinese policy decisions, which will be important in determining the pace of economic growth throughout the world, according to Bryson.
The Wells Fargo economic team expects China to grow 7.5% in 2013, down from 10% in the past few years. The United Kingdom is expected to emerge from a recession with 1.2% GDP growth in 2013. But Japan is expected to decline from 2.1% in 2012 to 0.5% in 2013.
Also, important trade partners with the U.S., the economies in Canada and Mexico are expected to slow in 2013, according to Bryson.
Canada’s GDP is expected to slow to 1.7%, down from 2% in 2012. In Mexico, GDP has grown 3.7% in 2012, this is expected to slow to 2.7% in 2013.
Among the developing nations, India and Brazil are expected to post positive economic growth in 2013, according to Bryson.