The delay in resolution of the Fiscal Cliff certainly had a negative impact on consumer spending in the fourth quarter and will likely have an adverse effect on Q1 2013 GDP growth as many corporations postponed initiatives awaiting the outcome.
At the beginning of this year we made the following statement with regard to the domestic economy: “We expect 2012 to be very similar to 2011.
The domestic economy demonstrated some remarkable resilience in the fourth quarter as GDP continued to expand and the unemployment rate continued to decline.
The jury is still out as to whether the last couple months were simply a “soft patch” for the economy or an indication the economic recovery has stalled. The argument for the former is based on the fact commodity prices, in particular agricultural and energy prices which were up 30% and 40% respectively over the previous 8 months, had risen to a level at which consumer discretionary behaviors were adversely impacted.
The recent extension of the Bush-era tax cuts along with the temporary 2% payroll tax reduction and extension of unemployment benefits should go a long way toward kick-starting a recovery that was showing signs of stalling. The extension of the Bush tax cuts removes the uncertainty of a potential tax hike that many Americans feared; and, the temporary payroll tax reduction effectively serves as another round of fiscal stimulus.
The economic recovery in the U.S. appears to have hit a speed bump. While we don’t see any concrete evidence to support the notion of a double-dip recession at this juncture, we have seen a slowdown in general economic activity and job growth.
The U.S. economy continues to show signs of modest improvement: new jobless claims are trending lower and retail sales, sparked by early and deep discounting, showed some life during the Holiday shopping season. We believe inventory replenishment will likely spur further growth in the first couple quarters of the new-year. Historically, the deeper the economy’s recession has been, the stronger the subsequent recovery will be.
The U.S. economy is showing some modest signs of life as we enter the 3rd quarter of 2009; and, corporate earnings guidance for the second half of the year is a bit more upbeat than it has been.
The new administration’s economic stimulus package will certainly help alleviate some of our economic woes; but the U.S. consumer is likely to remain dormant until we see some price stability in the housing market. We suspect that could be a long process, given increasing foreclosure rates are only adding to an already bloated supply of unsold homes. In short, we believe this may be the longest and deepest recession our economy has experienced since the Great Depression.