Sunday Times (London)
November 25, 2012
by Irwin Stelzer
Tomorrow, Americans go back to work after a long Thanksgiving weekend of turkey (46m gobbled up), trips (44m Americans in cars, planes and trains) and going to the mall (147m customers).
By Christmas, consumers will probably have spent about 4% more than they did last year in stores (bricks) and on line (clicks). For the first time, many retailers began their "door-buster" sales on Thursday evening rather than at 6am on Friday, while more customers than ever, literally bloodied in past scrums, placed orders online.
And the scramble for 40in flatscreen TVs, $180 (£113) at Best Buy; Nikon digital cameras, $100 (£63) at Target; and fleece hoodies, $12 (£7.50) at Walmart, will continue tomorrow, cyber-Monday, when orders can be made on company rather than personal time.
There's more, but you get the idea. Competition works for consumers, with technology making it so easy to compare prices that many retailers offer refunds if competitors have better deals. If you can't be competitive, "shame on you", said Terry Lundgren, chief executive of Macy's, speaking from the floor of the chain's New York flagship store against a background of customers including thousands of foreigners in search of the bargains denied them by restrictions on competition in their own countries.
Whether consumers continue to spend in the new year will determine the pace at which the American economy will grow in 2013. Some economists are calling a 2% annual growth rate "the new normal", while quibblers who believe they can forecast growth within a few decimal points say 1.7% is more likely. Both guesses are based on the assumption that in 2013 consumers will continue to snap up large numbers of cars, and that the housing sector will continue to recover.
The fleet of cars on the road is ageing, and with the jobless rate at least stabilised so that those in work can be reasonably confident they will not be laid off — one of the reasons President Barack Obama did so well despite continued high unemployment — there is little reason to defer gratification any longer. Besides, most buyers are sufficiently innumerate to be able to persuade themselves that the more fuel-efficient newer vehicles will "pay for themselves" in a short time. So count on good car sales.
So, too, with houses. Interest rates are at record lows — about 3.3% for 30-year fixed-rate mortgages — and only last week Ben Bernanke, the Federal Reserve Board chairman, told the Economic Club of New York that the Fed will continue purchasing mortgage-backed securities to the tune of $40bn every month to ensure mortgage rates don't go up — if not for ever, at least into 2015. Sales of existing homes in October were 10.9% above year-earlier levels and likely to end the year at their highest level since before the financial crisis. Prices are up 11% over last year, and inventories of unsold houses down 22% to their lowest level relative to sales in almost seven years. The number of new homes being built and sold is rising, although not to levels seen before the housing slump. Builders, whose shares by one measure are up 90% this year, are more confident than they have been since May 2006.
But one cheer only, please. Almost one sale in four is at a price below the level of the outstanding mortgage, banks are still reluctant to extend credit, and it is a long way from here to a housing market that will provide employment for lots of construction workers. Still, the trend is up rather than down.
Unfortunately, to predict with confidence that consumers will behave in 2013 as they have in 2012 is to ignore the warning by the distinguished Danish physicist Niels Bohr, who famously said: "Prediction is very difficult, especially about the future." It's doubly difficult in a world in which there are more known unknowns — things we know we don't know — than is usual. We don't know how better-off consumers will react to the large tax rises in store for them next year. Not only is the president likely to get the increase in marginal income tax rates he is demanding — although the starting point might be families with annual incomes in excess of $500,000 rather than his preferred $250,000 — but taxes on dividends and capital gains will go up, and the 3.8% Obamacare tax on their investment incomes will cut in, along with a host of other taxes buried deep in the bowels of the huge Obamacare legislation.
No one expects business investment, which has fallen off a cliff of its own, to be a growth booster in 2013. A Wall Street Journal survey of the intentions of large companies reveals that at least half are scaling back investment plans. Corporations, sitting on some $2trillion in cash, blame the uncertainty about the fiscal cliff for their reluctance to part with cash. Well, that uncertainty will be no more in a few weeks, when a deal to avoid the cliff is cut.
Unfortunately, the new certainty will include:
? A less favourable tax regime, shorn of many special benefits now enjoyed by the oil and other industries;
? Rising healthcare costs as the provisions of Obamacare become effective;
? Cutbacks in government spending on the defence and other industries;
? A flood of new regulations;
? A European recession that has shrivelled exports to the EU 27;
? Pressure on profit margins and share prices.
So it is a reasonable guess that most companies will remain reluctant to undertake big new projects.
Still, America had good reason to be thankful this past weekend. Our slow growth tops the declines being experienced by many eurozone countries; our entrepreneurs continue to astound with new products; our banks are in better shape than most of those in other countries; a vigorously contested election did not see the jailing of a single dissident or a single tyre set alight; and we are about to enter an age of energy abundance that is luring manufacturing back to America. Any remaining problems can be cured by the politicians who created them.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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