News Analysis date published New: 
Thursday, December 6, 2012 - 11:30
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Thursday, December 6, 2012 - 14:05
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Thursday, December 6, 2012 - 11:30

8 Critical Signs That Will Shape the Economy in 2013

Thursday, December 6, 2012 - 11:30am

Resilient -- there's simply no other word that describes the U.S. economy.

It has been faced with so many challenges during the past few years, and yet it's actually growing stronger -- at least by several key measures. You can also chalk it up to a bit of good luck. After the Great Recession of 2008, many companies continued to invest in growth, even as consumers were trembling with fear. Nowadays, consumer spending is beginning to have a tangible effect on the economy, even as key corporate metrics start to wane. If these pillars of the economy can remain healthy in 2013, then we may finally be able to witness economic growth with breakaway speed.

To have full grasp of these pillars, here are nine key metrics, how they've trended in 2012 and what we can anticipate for 2013.

1. Consumer sentiment is clearly strengthening
Earlier this summer, consumer-sentiment surveys were pointing to trouble ahead. Whether it was the early days of discussions about the looming "fiscal cliff," uncertainty about the presidential election or renewed fears that European and Asian economies would fall off the rails, consumers had ample reason for concern. Yet in recent months, they've decided "to heck with it," and for reasons that are hard to pinpoint, consumers have been feeling much perkier recently. October's measure of 88.1 was the highest in more than five years on the Thomson Reuters/University of Michigan Consumer Sentiment Index.

2. This housing rebound is for real
One possible explanation for brightening consumer sentiment: The housing market has clearly turned the corner, with monthly existing home sales and median home prices rising at a roughly 10% pace for much of the year, compared with year-earlier measures. Rising home prices tend to bolster consumers' sense of wealth, which can unlock discretionary spending. Another sign of housing support: The monthly supply of unsold homes has fallen from 7.9 months worth of inventory to a recent 5.4 months, according to the National Association of Realtors.

3. A steadily improving job market
Although the prevailing sense of a weak job market remains, the numbers point to a brightening trend. After a pullback this summer, nonfarm payrolls have expanded by at least 148,000 in each of the past four months. What is especially impressive is the relative resiliency of the job market in the face of shrinking government payrolls. The question for the months ahead: Will a grand bargain from Washington to avert the fiscal cliff entail more federal job cuts? If so, then the private sector will need to show its mettle to take up the slack.

4. Rising exports
The reasonably impressive job numbers may be partially attributable to a still-decent outlook for exports. Even with Europe in the tank and China wobbling, U.S. manufacturers have still been able to post solid year-over-year gains in the export of goods. If Europe stabilizes in 2013 and seeks to make up for years of deferred capital spending, then U.S. exports can grow even more quickly in 2013.

5. Lean inventories
Yet manufacturers are still playing it safe when it comes to inventory. Outside of the auto industry, most industries are carrying just five weeks worth of inventory (as a percentage of sales). If the economy strengthens into 2013, then many manufacturers may seek to bolster inventories, and an economy always prospers during a phase of inventory rebuilding.

6. Purchasing agents getting busier
Perhaps in response to still-lean inventories, companies appear to have started placing more orders. The Institute for Supply Management's Purchasing Manager Index (PMI) rose to 52.8 in November, the highest reading since May. Any number of more than 50 signals an expansion in the manufacturing sector.

7. Small businesses are hurting
Even though the economy looks a bit healthier, small-business owners remain quite cautious. The monthly survey from the National Federation of Independent Businesses (NFIB) shows that the Small Business Optimism Index continues to hover around 93. The survey showed that just prior to the election, a record high 23% of small-business owners felt uncertain about business conditions during the next six months. This eclipsed the pre-recession record of 15% reached during former President Jimmy Carter's administration, according to the NFIB. The next report comes on Dec. 11, and it will be interesting to see whether the recent elections had an effect on that uncertainty. Then again, until the current budget impasse is resolved, small-business owners are likely to remain cautious.

8. The Chicago Fed's bleak view
I've saved the worst for last. I looked at the Chicago Fed National Activity Index (CFNAI) in June, and this broad-based measure of economic activity has only worsened since then. In fact, the index's -0.56 reading for October is the lowest in several years. The CFNAI has an uncanny ability to predict quarterly gross domestic product (GDP) growth rates, so the recent negative readings imply weak economic growth in the current quarter.

Risks to Consider: The size and scope of looming government budget cuts and tax increases could create a drag on the economy, so you need to track these data points quite closely as we head into spring.

Action to Take --> A clear trend has emerged. Consumers are leading the way even as corporate America seems to be on shakier ground. But once Washington comes to a budget deal, corporate spending may reverse course and the stage may be set for a more robust economy in 2013.

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David Sterman does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.

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