2013 Outlook

January 14, 2013

After a quick start to 2013 for economic data and events in recent week, the coming weeks are relatively quiet. The key domestic economic report due out this week is likely to be the latest weekly reading on initial claims, as markets focus on the unofficial start of the fourth quarter earnings reporting season. Five Federal Open Market Committee (FOMC) members are scheduled to speak this week, and almost all of them have spoken out against quantitative easing. Overseas, a full slate of Chinese economic data for December 2012 are due out, as well as key central bank meetings in the Eurozone, the United Kingdom, and South Korea. In addition, both Spain and Italy will auction debt.

On balance, last week’s U.S. economic data on manufacturing, employment, vehicle sales, consumer sentiment, and the service sector for December 2012 exceeded expectations, and kept real gross domestic product (GDP) on track to post a gain of between 1.5% and 2.0% for the fourth quarter of 2012. Any increase in GDP in the fourth quarter of 2012 would mark the fourteenth consecutive quarter of economic growth since the end of the Great Recession in the second quarter of 2009.

Looking ahead into the current quarter (first quarter of 2013), growth may get a boost from a rebound from Superstorm Sandy, but the payroll tax increase that occurred as a result of the fiscal cliff deal signed into law by President Obama will put a dent into consumers’ disposable income in the
quarter, and leave real GDP growth around 2.0%. Looking ahead, failure failure to address the debt ceiling (and lingering sequestration issue) may lead to a recession in early 2013, while a quick resolution to the looming debt ceiling debate along with a “Grand Bargain” to address the nation’s longer term fiscal issues could lift real GDP growth into the 3.0% range for the year.

On balance, the first quarter, and indeed 2013 in general, is shaping up as follows: On the positive side:

  • Rebuilding of infrastructure and housing stock damaged by Sandy;
  • A continuation of recovery in the housing market;
  • A reacceleration in growth in China and emerging markets, which will help boost exports; and
  • A rebound in business spending after fiscal cliff and election-related uncertainty hurt business capital spending in the fourth quarter of 2012; should help offset the following negatives;
  • Tepid consumer spending;
  • Weak federal and state and local government spending; and
  • Muted contribution from net exports with Europe still in recession.

Overall, from an economic standpoint, 2013 may look and feel a lot like 2012.

Economic Update: The View From 3 Months In

April 24, 2012

Except for those who are still unemployed, 2012 has been a good year so far. The U.S. economy is recovering slowly, and there are many indications it will continue to recover. Markets are up, with the Dow reaching the 13,000 milestone last seen in 2007. Greece hasn’t defaulted. Even unemployment is showing signs of improvement.

The U.S. picture
The consensus prediction is for 2% to 3% economic growth in 2012. That’s better than the 1.7% of 2011, but too slow to quickly cut unemployment from 8.3% to a more acceptable level.

Job creation, nevertheless, is increasing. December, January and February added 244,000 jobs a month, the most since before the Great Recession. Many experts think that productivity growth is maxed out and more hiring is inevitable. Businesses are investing in new equipment after spending the last two years increasing production by working off spare capacity.

Consumers are spending and borrowing again, even for big-ticket items like cars. February auto sales were at the highest since 2008. Housing starts show signs of recovery, spurred by continuing record-low mortgage rates.

So what gives us pause? Oil. Should tensions with Iran turn to war, higher gas prices would dramatically cut consumer spending, and slow the U.S. economic recovery as a whole.

Europe and Asia
Europe appears to have avoided a severe financial crisis, and while its recession is expected to be mild, the United States is feeling the effects. Banks with exposure to European debt, and the global economy as a whole, may be affected if debt restructuring doesn’t go smoothly.

China’s growth is slowing, impacting the global economy and the recovery of almost every nation. Can the Chinese avoid a hard landing on one hand, and avoid inflationary over-stimulation on the other hand? We’ll see.

What we think
We’d summarize the first quarter and the outlook going forward with two words: wary confidence. There might be some slowdown and market volatility. Oil prices will affect the economy. Fixed income has been a haven for investors, but that may be changing. Interest rates are likely to rise, and the 30-year bull market in bonds will become more bearish. And, as always, a diversified portfolio is a prudent hedge against unpredictable events and a good long-term strategy for investors.


Wealth Enhancement Group

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

4 important “Es” for 2012

January 25, 2012

When looking at 2012, as always, expect the unexpected. But for now, here are four expected influences on the markets: the 4Es.


Europe is potentially entering a recession as a result of its sovereign debt crisis. The continent is our largest trading partner, which means less potential demand for U.S. goods and services to help our own recovery. U.S. companies with businesses in Europe may see a downturn;
U.S. banks and investment portfolios likely face losses from European debt and equities. Most analysts, however, think that markets and companies have already factored in a European recession.

Emerging Markets

China’s expansion is slowing, but whether it will have a hard landing in 2012 remains to be seen. A Chinese downturn would mean lower demand for U.S. commodities, which means lower sales for companies like General Motors, for which China is a growing market. It’s important to remember, however, that emerging market countries have old-fashioned tools like capital controls, regulations and state ownership to help them avoid recession.


Employment is a bright spot for U.S. recovery. Weekly initial jobless claims are now at a rate consistent with ongoing employment growth. Layoff announcements are down sharply, and hiring intentions and online job advertising are back to 2008 levels. Hiring intentions of small business recently matched levels from before the 2008 recession; this is important because firms with fewer than 500 employees account for about half of private sector employment and non-farm private sector GDP.


Markets hate elections because they’re unpredictable.  This being an election year, investors looking for clarity on policies, regulations, and key issues like debt reduction will have to wait until 2013. But history points out the S&P 500 has gone down in only three of the 21 presidential election years since 1928.

Net of the 4Es: uncertainty. There’s also, however, unquestionably more optimism in the country than there was six months ago. We advocate staying invested in a broadly diversified portfolio for the long term; we’ll be watching and evaluating opportunities to manage for both return and risk as the year progresses.

 James Copenhaver, Director of Investment Management



China’s Choices

December 11, 2009

In normal times, the Chinese government uses the banking sector to send masses of low-interest rate loans to companies and sectors targeted for growth. This maintains growth and employment levels, preserving social and economic stability in a country with a massive population.

In times of stress, this aggressive lending goes into overdrive. The year 2009 has witnessed an unprecedented lending-surge by Chinese banks, who, under government direction, hoped to stave off a recession in China’s domestic economy as exports to the U.S. and rest of the world plunged. This has been a dramatic success. For example, the data reported for the month of October was very strong:

1. Growth of industrial value-added, which accounts for about half of China’s GDP, accelerated to 16% year-over-year.
2. Electricity production, a good growth barometer, grew by 17% year-over-year.
3. Steel production set a record 44% year-over-year gain.
4. Retail sales increased 16.2% year-over-year.
5. Vehicle sales totaled 1.2 million (more than the 838,000 sold in the U.S. in October).

By the end of the year, the net new loans fueling this growth are likely to total more than $1.5 trillion, which would equal over a third of China’s GDP. In October, the money supply was up 29.4% year-over-year and bank loans were up by 34%. This is a massive lending spree, even by China’s standards.

Much of the lending that was targeted to growth industries has leaked into the stock and real estate markets, which have rallied dramatically and are beginning to form bubbles. With subsidized loans still growing and the global economy now in recovery mode, the threat of double-digit inflation (already prevalent in India, another BRIC country) is looming.