Thursday, January 10

Economy poised to grow, once DC gets out of the way

Economy poised to grow, once DC gets out of the way

John W. Schoen , NBC News

If the ongoing political dysfunction in Washington is weighing on the U.S. economy, someone forgot to tell Philip Derrow.

The second-generation CEO of Columbus, Ohio-based Ohio Transmission Corp., just closed his company’s 2012 books with 15 percent revenue growth for the year and a 10 percent expansion of the company's payroll. Derrow said he’s looking forward to a strong 2013.

"The talk in the media is harmful, the absence of leadership in our political class is harmful, but business leaders have an obligation to find a path forward," he told NBC News. "Sitting on your hands is how you lose. And losing is not an option."

Despite widespread, dire warnings that the ongoing budget stalemate threatens to send the U.S. back into recession, recent underlying economic data tell a different story.

The latest came from payroll processor ADP, which said U.S. private-sector employers added 215,000 jobs last month, well above economists' expectations. A separate report on planned layoffs showed the first drop in four months, according to employment consultants Challenger, Gray & Christmas, Inc.

"All the labor market data - the payroll numbers the jobless claims every else - have held up very, very well,” said Mark Zandi, chief economist at Moody's Analytics. “So there’s no sign of the fiscal cliff on the job market."

The improvement in the job market echoes signs of strength in the housing and auto industries. Despite the ongoing recession in Europe, manufacturers closed out the year on an upswing. Although retailers reported lackluster holiday sales, consumers have sharply pared down debt and built up savings, all of which bodes well for 2013.

Despite multiple pressures weighing on growth, the U.S. economy’s normal state is expansion. Beyond the underlying demand created by population growth, households continue to strive to build wealth and businesses remain bent on increasing profits.

As obstacles are removed – including the uncertainty over tax policy that was partially removed by the New Year’s fiscal cliff deal – those underlying forces have a better chance of taking hold.

Investors staging a New Year's rally in the stock market seemed to be betting that may happen in 2013.

"The underlying economy has momentum, and the employment data confirms that," said John Brady, a managing director at the investment firm R.J. O'Brien & Associates in Chicago. "The hope and prayer of the market is that our political leaders don't screw it up."

There are plenty of ways Washington could continue to hold back the U.S. economy. The most pressing is the possible repeat of the debt ceiling spectacle that produced the fiscal cliff in the first place, after lawmakers brought the country to the brink of a self-inflicted Treasury default in July 2011. The political “solution” was the creation of a fiscal cliff time bomb that has yet to be fully defused.

The ruinous, automatic spending cuts called for in that strategy are still in force; the recent deal just delayed them for two months. With government spending fueling about 20 percent of the U.S. economy, deep cuts could quickly derail growth coming from households and businesses.

Business investment has also been weak due in large part to the ongoing debate about the thicket of corporate taxes, including a series of temporary incentives to try to spur growth. Ironically, those measures may have added to the uncertainty that has prompted companies to hoard cash.

Derrow cites the government’s 2009 “cash for clunkers” program that produced a surge in car buying that summer, followed by a sales hangover once the incentives were exhausted. Short-term incentives designed to spur companies to buy new equipment and vehicles have made it harder to set long-term plans for investing capital, he said.

“Many if not most businesses have money to spend,” he said. “The problem is that policymakers for the past four years have made that spending very unpalatable."

But four years into the weakest recovery in a half century, pent-up demand is helping to overcome those hurdles to investment. After the worst contraction since the Great Depression the housing market is showing convincing signs of recovery.

Contracts to buy previously-owned U.S. homes rose in November to their highest level in 2-1/2 years, an industry group said last week. Though some local markets remain under pressure, home prices in most parts of the country are rising again.

That's good for the construction industry, according to Zandi. “I think we’re on the leading edge of a lot of construction jobs,” he said. “We are going to see a lot more homes built and a lot more office towers built over the next couple, three, four years. And so I think we’re going to see a lot of construction and construction-related jobs.”

The U.S. auto industry is also coming off a strong 2012 and expects higher sales in 2013. A new study by R.L. Polk forecasts 15.3 million new vehicle registrations in the U.S. this year – up 6 to 7 percent from the anticipated final sales numbers for 2012 and a roughly 50 percent increase from the bottom of the automotive market collapse during the recession.

American households, meanwhile, are making slow, steady progress in rebuilding the wealth lost to the housing and financial collapse. Much of the improvement has been the result of the Federal Reserve’s relentless, easy-money policy to drive down borrowing rates.

The savings on monthly mortgage and credit card payments have helped consumers work off the financial hangover of an epic, mid-2000s borrowing binge Though millions of homeowners remain underwater on their mortgages, the overall ratio between debt and disposable income fell to a near-decade low of 113 percent in the third quarter, after peaking at 134 percent in mid-2007, according to the latest Federal Reserve data. Even as wages have stalled, households’ overall net worth hit a four-year high in the third quarter of more than five times annual disposable income.

U.S. banks have also recovered from the heavy, self-inflicted losses brought on by risky bets on mortgage bonds that went bust. Though lending remains tight for all but the most credit-worthy borrowers, the banking system is better able to withstand the kind of financial shock that plunged the global economy into a steep recession more than five years ago.

For businesses like Ohio Transmission, there will always be potential landmines and obstacles to growth. But, after 30 years running the company, Derrow said that’s nothing new.

“The natural state of the American economy is for things to get better,” he said. “As business leaders, we make promises to our people that we'll find a positive way forward. That’s our job. That’s part of what makes business fun.”

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