The Fiscal Cliff Will Prove to Be a Dud – and More Optimistic Forecasts for 2013

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Lowry goes on to say, in part:

1. Consumer Spending on the Rise

The Fiscal Cliff, like the Millennial computer bug, will prove a dud. The U.S. economy runs on final demand, which primarily means consumer spending. Government spending also is part of demand, but it has to come either from taxes or from borrowing. Neither is as good as good consumer spending. Good consumer spending is spending based on increased income, not borrowing. On that front, recent news is encouraging.

Below is a graph from…Bill McBride at Calculated Risk …[which] illustrates how consumer spending is getting healthier:

McBride reported on December 21, 2012, that “Personal income increased $85.8 billion, or 0.6 percent … in November, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $41.3 billion, or 0.4 percent.”

2. Household Formation is Picking Up

[The above] means that the growth in consumer spending was healthy, being based on growth of personal income, and…[should] continue because household formation is picking up. Don’t fight the Fed and don’t fight the Demographics. Household formation is, in many ways, the key to the American economy because it results in spending on so many forms of goods and services. People starting a household need everything from homes to refrigerators to paint jobs to pots and pans.

Over the last five years, household formation has been at historic lows compared with increases in population,…[according to] a recent Credit Suisse research note…[with] depressed household formation during the 2008-2012 period. That anomaly means that not only do we have the usual forces propelling household formation; we also have pent-up household formation that gradually, over the next few years, should make for robust demand for everything a household needs….

3. Demand for New Homes Should Increase

Household formation also, of course, will tend to drive the market for new homes and will tend to promote the emerging increases in house prices. These events will be part of a virtuous cycle in which increasing house prices will make it possible for aging boomers to sell their houses, move to warmer climes, and add to the household formation boom by engaging in their own redecorating and home improvement. Home building has traditionally led of the economy out of recessions. It has been held back in the last four years by the overhang of foreclosed properties and the lack of household formation….

4. Industry Will Become More Competitive Internationally

I would add to…[the above] economic tailwind the benefits of more abundant oil and gas. Over the next few years, the prices of these commodities are likely to stay in check. That will give American manufacturing businesses a leg up on foreign competition that should lead to increased sales and new jobs.

5. Growth in Jobs & Economic Activity Will Increase Tax Revenues

This growth in jobs and economic activity will increase tax revenues as well, thereby bringing down the U.S. fiscal deficit and easing the concerns about the ability of the U.S. to fund its debt….

Where to Invest?

[Personally,]…I like stocks of companies with sound balance sheets that make or sell the kinds of stuff that household formation causes people to buy…. For an investor with a lot of money on the sidelines and little time or inclination to do much research, I think probably this is not a bad time to buy a broad index fund, such as SPDR S&P 500 ETF (SPY), as long as the investor understands that the market in general goes up and down, often in ways unrelated to fundamental values and that global events often derail expectations for periods of time. We have had almost four years of market recovery. We should not expect big upsides over the next few years because the market already has priced in much of the good economy that I and others are forecasting. Nevertheless, I believe that stocks will bring greater returns than other financial assets.

A 3-year Process

The process that I am describing is about a three-year process that should take us through 2015. I cannot quantify the progress that this process will create. As I said at the outset, I do not have a model.

My forecast for 2013 is more optimistic than the forecasts of many of the economists that I respect the most, but it is in line with their expectations for 2014-2015. The only substantial difference is that I think the first half of 2013 will not be as weak as they forecast….

[ABOUT Martin Lowy: Trained as a lawyer and practiced in the fields of corporate law and bank regulation in large U.S. firms for 20 years…[He is now]…retired from active business and a full-time writer, mostly on economic subjects. His books include: High Rollers: Inside the S&L Debacle (1991); Debt Spiral: How Credit Failed Capitalism (2009); Practical Handbook for Bank Directors (1995), second edition due 2012; Corporate Governance for Public Company Directors (2003)]

*http://seekingalpha.com/article/1082391-bullish-on-the-economy-for-2013-2015

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