Most economists agree that Wednesday's snapshot of U.S. economic growth is going to look dismal.
Most economists agree that Wednesday’s snapshot of U.S. economic growth is going to look dismal.
The consensus forecast from Factset is economic growth slowed sharply from October through December to an annual rate of 1.2 percent. That’s down from a 3.1 percent rate in the July-September quarter and would be the slowest in nearly two years.
Growth will probably remain sluggish at the start of the year because Americans are coming to grips with an increase in Social Security taxes that has left them with less take-home pay.
But economists are cautioning that the Commerce Department report may also highlight underlying strengths that could propel the economy in the second half of 2013.
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“This is not as bad as it looks,” said Nigel Gault, an economist at IHS Global Insight, who is forecasting a measly 0.3 percent expansion in the fourth quarter.
A key reason economists are not too worried is the weakness was probably the result of a number of one-time factors: slower growth in stockpiles, less government spending and a wider trade gap.
Those factors likely offset faster growth in consumer spending and the seventh straight quarter in which housing contributed to economic growth. Businesses may even have invested more in equipment and software.
Overall, the economy probably expanded at a roughly 2 percent annual rate in the second half of 2012 – about the same modest growth that has occurred since the recession ended three and a half years ago.
The subpar growth has held back hiring. The economy has created about 150,000 jobs a month, on average, for the past two years. That’s barely enough to reduce the unemployment rate, which has been 7.8 percent for the past two months.
Economists forecast that unemployment stayed at the still-high rate again this month. The government releases the January jobs report Friday.
The biggest question going forward is how consumers react to the expiration of a Social Security tax cut. Congress and the White House allowed the temporary tax cut to expire in January, but reached a deal to keep income taxes from rising on most Americans.
The tax increase will lower take home pay this year by about 2 percent. That means a household earning $50,000 a year will have about $1,000 less to spend. A household with two high-paid workers will have up to $4,500 less.
Already, a key measure of consumer confidence plummeted this month after Americans noticed the reduction in their paychecks, the Conference Board reported Tuesday.
And if consumer spending also fizzles, growth could stay low in the January-March quarter. Consumer spending accounts for roughly 70 percent of economic activity.
Complicating the outlook are more budget fights in Washington. A set of across-the-board spending cuts are scheduled to take effect March 1 that Congress and the White House would like to replace with more targeted cuts.
The nation’s borrowing limit will be reached May 1 and will need to be raised so that the government can continue to pay its bills. Uncertainty over how those issues will be resolved could drag on the economy into the summer.
But once the budget disputes are resolved, and Americans have adjusted to the expiration of the Social Security tax cut, growth could pick up. Several positive trends are expected to fuel better growth later this year.
Construction firms will build more homes to meet steadily increasing demand for houses and apartments. That should create more construction jobs. And home prices are rising steadily. That makes Americans feel wealthier and more likely to spend. Housing could add as much as a percentage point to economic growth this year.
Auto sales, meanwhile, reached the highest level in five years in 2012, and are likely to keep growing. That’s boosting production and hiring at U.S. automakers and their suppliers.
That’s making economists more optimistic about the second half of this year. Economists at JPMorgan Chase expect growth to reach a solid annual rate of 3 percent in the final three months of this year.
And a quarterly survey by the National Association of Business Economics released Monday found that one-third of firms expect to add more workers in the next six months, the highest proportion since April.