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Forecast 2013

By Hannah Wallace January 1, 2013

Our experts agree that economic growth hinges on politics, Obamacare and real estate.

 

It’s tricky to forecast the year ahead before Congress and the president reach an agreement—or not—about the fiscal cliff, but our trusty team of economic soothsayers gazed into their crystal balls in mid-December and gave us their best predictions for 2013. (Their forecast for last year, by the way, was right on the money.)

 

Our Economists

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Dr. Frank Alcock teaches world politics, international law and sustainable development at New College of Florida. He was formerly an international policy analyst and economist at the U.S. Department of Energy.

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Don Grimes is a Sarasota resident and economist at the University of Michigan who specializes in labor and employment. He conducted a 2009-10 economic outlook study for Sarasota County.

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Dr. Sean Snaith is director of the University of Central Florida’s Institute for Economic Competitiveness, specializing in business and economic forecasting.

 

Q:

Q: What is the outlook for 2013?

Snaith: Florida real GDP growth: 2.3 percent and U.S. GDP: 2 percent.

Grimes: At the national level, the outlook ranges from recession, possibly severe, to slow positive growth. Sarasota should slightly outperform the nation in either case, either declining less severely or growing more quickly than the national economy. Whether we get a recession or slow growth will be determined by President Obama and the Congress.

 

Q: Will we have compromise or political gridlock in Washington?

Grimes: Eventually we will get a compromise; the real questions are when and how will that compromise be reached. We must raise tax revenue, including from the middle class, and reduce the growth rate of spending, especially entitlement spending, including benefits for current recipients. The sooner we reach that compromise the smaller the sacrifice will be. Unfortunately, it will probably take a crisis to force the national political leadership to accept the facts; thus, arriving at the compromise will be messier and more painful than it should be.

Alcock: There will be a compromise. If we “go over” the cliff it won’t be for long. I expect a tax and budget deal to happen before the State of the Union address. Tax rates will increase for the highest-income earners, some deductions will be eliminated and meaningful entitlement reforms will be included, although their effective dates might be put off for quite some time.

Snaith: I am hesitant to give up hope; it is all we have right now on this front. But the rhetoric sounds exactly like the pre-election demagoguery, and we continue to edge closer to the fiscal cliff.

 

Q: How will Obamacare affect businesses in 2013?

Grimes: Most of the provisions that directly affect businesses go into effect in 2014. The provision that most directly affects businesses is that they will pay a “tax” if they employ more than 50 full-time employees and don’t provide health insurance to all of their employees. This provision will encourage businesses to employ less than 50 people, if they do not want to provide “acceptable” health insurance to their employees. Since health insurance premium support is a fixed cost per employee, this provision will tend to affect low-wage employers like retail stores and restaurants more than other types of employers.

This provision will probably provide great work for lawyers and accountants in 2013 as they legally divide bigger companies into multiple smaller companies.

Since the provision will only affect direct employees of the business, it will also encourage employers, especially large employers, to rely more on “temporary” employment agency employees and other contingent workers. Lower-wage employees, who previously may have been uninsured employees of businesses, may soon find themselves as uninsured employees working through temporary help agencies without any employment benefits at all. Something about no good deed goes unpunished seems appropriate here.

Alcock: The big question is whether larger firms will reduce weekly work hours for a greater portion of their work force to avoid federal requirements providing health benefits (converting more of a part-time work force). Although this is possible, I don’t think the impact will be as big as many people fear.

Snaith: Businesses are already hesitant to hire in an environment of policy uncertainty. Many businesses will look to move employees from full-time to part-time status, thus avoiding having to provide healthcare or paying the penalty for not doing so. This will worsen an already problematic underemployment problem. When the rules of the game change, so will the behavior of the players playing the game.

 

Q: What effect do you think new taxes on the wealthy will have nationally and here in Southwest Florida?

Alcock: I suspect that the elimination of certain types of deductions (mortgages, charitable gifts) would have more of an impact than any increase in rates.

 

Q: Will employment rise in Florida and in our region?

Snaith: Employment growth will continue, and in 2013 job growth in Florida will overtake the national pace of job creation. In 2014 and beyond, Florida will grow at a faster pace than the national job market. Professional and business services will lead the way while federal government employment will continue to contract.

 

Q: What progress will we make on long-term debt reduction?

Alcock: It depends upon the specifics of a budget deal, especially on the entitlement reform side of the equation.

Snaith: If the post-election political environment is an indicator, it seems as though progress will be slow to develop. We have no choice but to make substantive changes or risk a fate that Greece is now facing.

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Q: How will consumer sentiment affect the economy this year?

Snaith: Consumer sentiment will be impacted by the political fighting and the rancor over deficit and debt reduction as it was in 2011. People will, as they did then, continue to spend, particularly on replacing aging vehicles. If we go over the fiscal cliff, the recession that ensues would undermine this prediction.

Grimes: Consumers feared that they might lose their jobs, and now that the worst has not come to pass, consumer sentiment moved up sharply this fall. In fact, consumers appear to be more confident about the economy than either businesses or economists.

Unfortunately for consumers, their newfound desire to spend money is going to run into the cold, hard reality that they will not have it to spend. Wage rates have not kept up with inflation, and the savings rate is down to 3.7 percent of personal disposable income in the third quarter of 2012. Most economists would consider a 6 percent to 7 percent savings rate to be appropriate. Between 1999 and 2007 the savings rate ranged between 1.5 percent and 3.6 percent, and while people enjoyed that spending binge, look at where we ended up.

Many of our residents are retired and living off their accumulated savings and Social Security, much more so than the nation overall. Their rate of spending will be either enhanced or restrained by what happens to the value of their assets, particularly what happens in the stock market.

 

Q: How will Europe and China affect us this year?

Alcock: Continued economic instability or worse in either Europe or China (or both) would have ripple effects that adversely affect us through lower exports, less tourism and possibly higher interest rates. I’m hopeful things won’t be too bad.

Snaith: A slower global economy will weigh on growth. The recession in Europe will continue well into 2013. It is likely that Greece will exit the euro over the next year. Whether this triggers a chain reaction with Spain being under the most pressure in the wake of a Greek exit remains yet to be seen. A Greek exit could scare the rest of the euro zone straight and lead to the significant fiscal reforms that are necessary to ensure the euro’s survival.

 

Q: Will the housing industry continue to improve in 2013?

Grimes: It looks like the real estate market will exceed expectations. Both the number of sales and prices have bottomed out, and given that the Federal Reserve is likely to keep interest rates at historically low rates at least through next year, it is a good time to purchase that new home. This is particularly true in areas like Sarasota, which have strong appeal to relatively affluent baby boomers who are getting ready to retire.

Alcock: I’m still concerned about underwater mortgages and foreclosure inventories.

Snaith: Recent housing data looks bright in comparison to the black hole of the past several years, but growth rates in the sector are computed relative to the depressed levels in this sector. Nonetheless, it is encouraging to see a pulse in a sector that has been flat-lined for years.

 

Q: What is your forecast for municipal bonds? Stocks?

Snaith: Uncertainty over policy will keep stocks range-bound, and the recovery will help municipal finances, but both will be impacted by whatever changes to tax rates and tax loopholes that may arise out of deficit and debt negotiations.

 

Q: If you were going to invest in anything this year, what would it be?

Grimes: Investment decisions depend upon the individual’s time frame and the depth of their pockets. One reason why the rich tend to get richer and the poor poorer is that the rich can afford to make long-term investments, which may not pay off immediately. Right now housing is a very good investment for someone with deep pockets and a long time horizon. Unfortunately, I don’t meet those qualifications, but if I did, that is where I would invest. It is still a very good time to purchase a personal residence—which should not be considered an investment because it is illiquid—so long as you intend to remain in that residence for three or more years.

Snaith: Rental properties and Hostess Ho Hos.

 

Q: As an economist, what are you most worried about right now?

Alcock: I’m worried that my budget deal prognosis is wrong, gridlock continues, uncertainty persists and the economy suffers more than anticipated as a result.

Snaith: The lack of serious progress on fiscal reform and the festering crisis and recession in Europe.

Grimes: In the short run, I am most worried about the fiscal cliff, doing too much to cut the budget deficit. In the long run, I am most worried about not doing enough to cut the budget deficit by reducing the growth in entitlement spending.

 

Q: What is your biggest hope this year?

Grimes: The housing market, which I have been bearish about since 2006, but now might exceed expectations by a wide margin, if, of course, we don’t fall off the fiscal cliff.

Snaith: Fiscal negotiations lead to a grand bargain on taxes, spending and entitlement reform of the scope and scale that were laid out in Simpson-Bowles deficit reduction commission report.

Alcock: Progress.

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