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If Economics Were Football, This Would Be The Preseason

As we weigh prospects for the future, whether of a football team or the economy, we see apparent strengths and weaknesses. However, these strengths and weaknesses are not always as determinative as they first appear. In 2012, Alabama, LSU and USC were all preseason favorites. LSU did not do as well as they had hoped, and USC soon fell apart. Notre Dame, on the other hand, was not even ranked---yet they played for the championship. Predicting the future is chancy.

So we look at 2013 and handicap the likely good things along with the not so good. First the good: housing, the consumer, energy, and corporate investment.

The consumer is a major element of our economy, accounting for 70% of domestic spending. For several years the consumer has been on his best behavior, cutting spending slightly while greatly reducing the growth of spending. These behaviors caused savings balances to rise and debt balances to fall, with the result that consumer debt load is less than at any time in the last 30 years. After most recessions, consumers generally satisfy the demand for goods that they have avoided buying during the recession. Not this time; consumer income growth has exceeded consumer spending since the recession. Consumers, should they choose, could increase spending faster than their incomes rise. The holdback for many consumers is the still-poor employment picture, and the uncertainty regarding any number of issues in Washington. Aware consumers know that they will likely see their incomes drop as taxes rise. If they are on Social Security or unemployment, they are uncertain about proposed changes. Employees of small businesses have heard their employers threaten to remove healthcare coverage, or to take other cost-saving measures to remain profitable.

So Washington is presently the biggest deterrent of consumer spending. Spending will probably increase in 2013, but not if Washington's roadblocks are maintained and augmented. A resolution to the budget impasse will be helpful. A good resolution would hold all the promise of the start of fall football season.

We are still behind in the building of new homes, whether single-family or apartment. Since the bottom in late 2009 at 400,000 units, we are now building 900,000 units. But we need to build 1,300,000 on average: first, to house our 1,000,000 new households, and then about 300,000 to replace burned, flooded or obsolete housing units. The overbuilding of the 2003 to 2007 period has been more than offset by underbuilding since 2008, and we continue to under build. Residential construction is one of the most powerful cyclical elements of our economy. Building a home spurs sales in construction material, sales of manufactured goods such as carpet, commercial lending in the building phase, mortgage lending at completion and employment. It is estimated that the increase from 400,000 to 900,000 units has created an additional 1.5 million jobs. What then can keep a prediction of substantially greater housing starts from coming true? A lack of confidence is the most likely suspect. As each young person is weighing the decision to sign a lease on an apartment, or each 30-something is deciding on a new bigger house, an element of confidence is necessary. Large among the elements of confidence is job security and prospective income after taxes. Washington's indecision and anti-growth leanings could derail what should be a great year in housing.

Energy prices are low, and likely to stay there. Gasoline prices continue to fall. Natural gas prices are low by historic standards, and likely to remain low. Demand for natural gas is rising rapidly as the low price stimulates use and substitution. Electric utilities which could switch to natural gas from coal or oil have done so. Municipalities, for environmental or cost reasons, have switched much of the bus fleet to natural gas. Long-distance trucking using natural gas is growing, though it faces hurdles from a lack of filling stations. Several companies are working to improve this situation; a nationwide supply network is expected by 2014. This switching reduces demand for oil and coal, and reduces costs. These cost reductions are similar to a tax cut. They make US-produced goods cheaper while they provide more spending money for consumers. These advantages derive from increased natural gas production caused by hydraulic fracturing and horizontal drilling. In America's history innovation has played a big part in making us strong and prosperous. However, Washington is not comfortable with these new energy technologies, and might intervene to curtail this prosperity.

Corporate Investment--- Cash on company balance sheets has never been higher. Debt on corporate balance sheets hasn't been this low in a long time. Companies have the wherewithal to spend, to build and to invest in their businesses. In 2013, we could see a change of heart from corporate frugality to corporate boldness. Several obstacles stand in the way: regulatory uncertainty, healthcare uncertainty, and unwillingness to repatriate foreign profits. Many industries, including banking, are still in the throes of regulatory reform. The regulations are unwritten, poorly understood, and ever-changing. This is a poor environment for corporate decision making.

Regarding healthcare, the process is further along, but is still a quandary to many business owners, particularly smaller companies. Profits made by US companies overseas are stranded by tax law. This leads to the unusual circumstance of companies having piles of money in Europe, yet needing to borrow for operation in the US. These stranded funds promote expansion of business in foreign countries at the same time as they deter expansion in the US. Companies with stranded funds face the dilemma of leaving the funds unproductive in other countries, or giving up 35% of these "after tax profits" to move them home. Clearly, they are choosing to preserve them abroad.

In sum, we have four huge advantages which should make for a great 2013. Housing, consumer, energy and corporate investment are all poised to be additive. We have one giant problem blocking the way: the federal government.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: See also disclosure in profile.