Economic Outlook: Slow and steady to 2013

Stagnant personal income, modest improvements in the housing and job markets and a curtain of uncertainty hanging over the U.S. economy will keep domestic growth muted in the back half of this year, according to a team of Wells Fargo economists.

The economists, who spoke Wednesday (June 27) at the firm’s Midyear Economic Teleconference, say U.S. companies have reported strong earnings through last year largely because of exposure abroad, particularly China. But as Chinese officials continue to tone down growth expectations and there is instability amid the Euro Zone, the ceiling on the U.S. economy is a low one.

“We will continue to drive through 2012 slowly, it’s like driving through a dense fog that will limit the U.S. growth to 2%,” said Mark Vinter, senior economist.

The group’s GDP forecast for 2013 is a muted 1.8%.

American consumer confidence has been incredibly low throughout this three-year recovery, at levels consistent with recessionary times, Vinter said. Income stagnation is also problematic with consumer expectations for higher pay stuck at zero, despite the fact the recession ended in the summer of 2009.

Even though many consumers haven’t seen a pay raise in three years, they are spending more and saving less. But Vinter doesn’t expect this trend to continue long-term given that access to consumer credit remains tough for many. He said lower gas prices will no doubt help those at bottom-end of the earning spectrum giving them a little more cash to spend, but the impact at higher income levels is mute.

The biggest drag on the overall economy continues to be a lackluster job market.

“The number of folks working and looking for jobs in this country sits at a 30-year low. Roughly 40% of the jobs added this year and last, have been lower paying, many part-time or temporary work largely in the hospitality and leisure sectors.” Vinter said.

Chief economist John Silvia said a 2% growth rate is well below the country’s potential.

“There are many young people out there who would love to set up a new household, if they can get and sustain jobs. There is certainly some room for improvement in 2013 if we can get passed the concerns over health care and Dodd Frank,” Silivia said.

He said if health care reform is overturned completely Thursday (June 28) by the U.S. Supreme Court it could spur the financial markets higher and help to accelerate the economy forward a little faster. But there is also threat of the political debates that often put commerce on hold ahead of a major election.

When asked how the education sector is performing in this recovery, the economists say a slow down is expected as local governments and public school districts remain strapped for cash and many unable to get taxpayers to pass bond elections for new schools.

Voters in the Bentonville School District soundly defeated a proposal to build a $128 million second high school on Tuesday (June 26). After all the votes were tallied, 58% were against and 42% supported the millage increase. School officials say they face a serious overcrowding issue at the high school and they will go back to the drawing board to find another solution they hope voters will approve.

“The Sunbelt States have been hit the hardest with needs for new schools and taxpayer revolt against new building. They already face high property taxes with stagnant income. Public universities are also pruning their budgets as state revenues are slim and tuition hikes have already been taken by many,” Vinter said.

GLOBAL IMPACT
While the U.S. economy is trudging forward, Europe is in the midst of a recession and China continues to slow its growth pace and convert its economy from an investment-driven model to one that is consumer driven.

The biggest initial threat on the world’s financial market is the turmoil unraveling within the Euro Zone and systemic risk for countries that have invested in sovereign debt of one another.

Vinter said if one falls, the risk for systemic collapse is huge because they are essentially holding up one another. France has the highest level of investment in the Euro Zone countries — roughly 20% of its GDP. In contrast, the U.S. investment is around 1% of its GDP.

He said the U.S. bank exposure to the Euro Zone is much greater, equal to roughly 8% of the GDP.

The economists say a Spanish default could trigger a Lehman-like event throughout the financial markets, which is a worst-case scenario.

HOUSING IMPROVEMENT
While the housing sector is still about three years from total recovery, homebuilders are working again as inventory levels have become more balanced. Vinter said housing is a very local market, with some doing better than others. But, he feels the shadow inventory is not as pronounced as once thought and home mortgage delinquencies continue to improve.

The Office of the Comptroller of the Currency reports first lien mortgages current through the first quarter of 2012 reached their highest level in three years, at the same time delinquencies of 30, 60, and 89 days also fell their lowest since 2008.

Vinter says it will take about three years or so before the foreclosure overhang is history, but during this time he sees improvement in both home sales and home values.