Export Development Canada chief economist Peter Hall has had another look at his assumptions – and he is sticking with his relatively aggressive outlook for the U.S. economy.
Mr. Hall, who stepped out of the pack last year by predicting good things for the United States in 2013, feels emboldened by recent indicators that show the world's largest economy survived the agonizing "fiscal cliff" debate in Washington. The human impact of Hurricane Sandy was terrible, but the blow to employment and gross domestic product appears to have been less than it could have been.
"We do indeed have momentum going into 2013," Mr. Hall says in his weekly note on the economy Thursday.
Mr. Hall predicts U.S. growth of 2.8 per cent this year. Other private forecasters are closer to 2 per cent. Tom Porcelli, RBC Capital's New York-based chief U.S. economist, sees growth of only 1.5 per cent in 2013.
It's difficult to get a good read on the economy right now. It feels good – stock markets generally are higher, home prices are starting to rise and automobile sales are through the roof.
Yet a closer look at the indicators often provides sobering second thought. Mr. Porcelli regularly advises his clients to curb their enthusiasm about the housing rebound, for example. The RBC economist points out that the increase in housing activity is being driven by multi-family dwellings – in other words, apartment buildings. Americans aren't building single-family homes at anywhere near their historical rate.
Why is this important? People tend to buy single-family homes and rent apartments. According to Mr. Porcelli, home owners spend about two times more on housing-related items than renters. A housing boom dominated by renters may not have the same economic impact as booms of the past.
Mr. Hall's optimism about the U.S. economy is rooted in pent-up demand. For four years, consumers have delayed purchases either because they were without jobs, committed to paying off debt or were scared about the future. With demand so tentative, businesses have held off on investment and expansion.
The need for extreme caution is passing. Mr. Hall predicts old-fashioned spending could replace government stimulus over the next couple of years. Housing starts are growing at an annual rate of about 860,000 a year, well below the 1.4 million that is needed to keep up with changes in the population. The average age of automobiles is unusually high, suggesting consumers could be poised to buy a rush of new ones. Businesses are operating at almost full capacity, suggesting they will have to invest and hire to keep up with demand.
"Years of hoping for something better than the mediocre stuff we saw has us all more jaded about future prospects," Mr. Hall wrote. "Higher growth addresses the big risks, and helps to quell our persistent fears – and it's on the way."
There are other optimists. Adam Posen, the new head of the Peterson Institute for International Economics, told reporters Wednesday in Washington that his is more "bullish" on the economy than the consensus. "The housing market is poised to take off," he said, adding that housing could add 0.3 percentage points to growth in each of the next two years.
But it must be said that the "bullish" bar is much lower in 2013 than it was in, say, 2005.
Like Mr. Hall, Mr. Posen predicts the U.S. economy will grow just less than 3 per cent this year. Before the crisis, growth at that pace was considered routine. And routine growth won't lower the elevated U.S. unemployment rate quickly. That takes economic growth at a rate faster than 3 per cent.
Even the optimistic outlook for the U.S. economy is a little disheartening.