Late last year I posted 10 thoughts on the upcoming year. It's not quite time to update those thoughts for 2014, but I do think an internal audit of the 2013 views is necessary. And who better to perform that audit than the person who created the Q&A? After all, if someone else does it then anything that makes me look bad will be overly emphasized. Makes sense, right?
Anyhow, here goes nothing:
Question: 1) What Will Happen With US Fiscal Policy?
Answer 1) The more likely scenario is moderate cuts and another year of economic muddle through as the budget deficit remains large enough to offset a healing private sector.
Auditor thoughts: With growth clocking in at a middle 2% range I'd say this one was pretty much dead on. And despite the budget deficit's decline the cuts didn't turn out to be a debilitating blow to the economy. As I repeatedly emphasized through the year the Balance Sheet Recession was ending and the private sector was increasingly running with the baton.
Question 2) What Will Happen with US Monetary Policy?
Answer 2) This one looks like a no-brainer. The Fed has been pretty clear that they'll remain accommodative through 2015.
Auditor thoughts: Another easy one. The Fed had forecast this one pretty clearly to anyone willing to listen. There was never a high probability that QE would end this year.
3) Is the US Economy Headed into a Recession?
Answer 3) If we get a relatively sane response then the budget deficit should remain large enough to support the private recovery in 2013. On the other hand, in a negative cliff outcome the US economy almost certainly suffers the European fate of austerity in a BSR and enters recession. I am going to make the insane call of assuming politicians will do the sane thing in the next few weeks and avoid a major budget catastrophe in 2013. Therefore, I still don't see the recession in the USA this year, but the odds are substantially higher than they were in 2012.
Auditor thoughts: There's been no recession in 2013 and growth has been slow, but it's been growth. Anyone who assumed the US economy would enter recession in 2013 based on the declining budget deficit ended up making a very bad call. This is another reason why it's important not to look at the budget deficit in isolation.
4) Is Global Growth Going to Slow?
Answer 4) Global growth appears to be stabilizing. The USA has maintained a muddle through environment, Europe has been mired in recession and Asia has stumbled a bit in late 2012. But that third leg of the stool (Asia) appears to be turning a corner. This has been apparent in global PMI data where the GDP weighted PMI is turning positive for the first time since early 2012. I think global GDP should stabilize further in 2012 largely on the back of a stabilizing Chinese economy.
Auditor thoughts: This was probably more wrong than right. China's growth muddled along while Europe actually generated a modest recovery. Overall, the global economy just sort of muddled along.
5) Is the Euro Crisis Over?
Answer 5) Bleh.
Auditor thoughts: This wasn't so much a call as it was a macro reality. Europe's crisis has been swept under the rug by a central bank that is willing to backstop the debt markets in a system where there is no sustainable mechanism to avoid sovereign debt crises.
6) Where is US Employment Headed?
Answer 6) I don't think it's unreasonable to assume that the unemployment rate will drop below 7% this year for the first time since the crisis flared up.
Auditor thoughts: Unemployment is at 7.3% right now and is estimated to be at 7.1-7.2% as of November. We could still see a 7% reading in December. Overall, pretty close.
7) Will High Inflation Finally Arrive in 2013?
Answer 7) Continuing weak demand for credit and virtually zero earnings power on the labor front will continue to suppress inflation. Contrary to popular opinion, I am not a deflationist and haven't been for many years. So, I see positive inflation, but low inflation in 2013.
Auditor thoughts: This was pretty close. I was definitely right that inflation would remain low in 2013, but I would actually say that the low rate of inflation even surprised me. I would not have guessed that we'd see sub 1% CPI readings this year.
8) Will hyperinflation finally come in 2013?
Answer 8) Bleh.
Auditor thoughts: I was basically just mocking the hyperinflationists here. Sorry. It's just too easy to tease them though.
9) Should You Buy a House in 2013?
Answer 9) Despite the many calls for recovery this year, I still don't see a big recovery in housing. That said, I also don't see great downside in prices. We've already had a massive decline in real house prices so I think we're most likely to see moderate gains at best in 2013. If you're looking to buy a home in 2013 and you're looking to live in that house then I think the downside risks are fairly limited.
Auditor thoughts: I was more bullish on housing in 2013 than I have been in the past, but the 12% rate of change this year was surprising. I was expecting something more in-line with inflation. So I was right to be bullish, but I definitely wasn't bullish enough.
10) What Will Happen to Corporate Profits in 2013?
Answer 10) There are a lot of moving parts here, but the likelihood of slow corporate profit growth is likely to continue into 2013.
Auditor thoughts: Corporate profits growth slowed to about 4% from double digit growth in 2012. It's growth, but it ain't what it used to be.
Later this month I'll post some new thoughts on the upcoming year.