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  • Economist warns of unsure fiscal future in 2013

  • The "fiscal cliff" has been sidestepped for now, the U.S. economy has been inching along in recovery since the middle of 2009 and housing has shown significant improvement for the first time since 2006.
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  • The "fiscal cliff" has been sidestepped for now, the U.S. economy has been inching along in recovery since the middle of 2009 and housing has shown significant improvement for the first time since 2006.
    Yet, the unknowns lurking at every turn demand attention from all points of the spectrum, from consumers to investors, according to economist John Mitchell, who gave his insights to a Chamber of Medford/Jackson County Forum audience Monday at Rogue Valley Country Club.
    "What is the economy?" Mitchell asked. "In a sense it's just the sum of all our actions as individuals and the different hats we wear as consumers, as investors, as employers. You add up the various categories of things we do and that's the economy."
    He suggested that people-watching will provide insight during the months ahead.
    "One of the fascinating things to watch as we move through 2013 is how are people going to behave."
    As significant increases in taxes and capital gains loomed in late 2012, companies paid out early dividends.
    "So you saw people pay capital gains in 2012 as opposed to 2013, moving things in time," Mitchell said. "People respond to incentives. All the sudden capital gains revenues came in much stronger than they anticipated in the fourth quarter last year and I have a hunch when you get to the first quarter this year they are going to be a lot lower than anticipated."
    The next stage of the Affordable Health Care Act, due for implementation next year, will lead to other moves.
    "How are people going to behave?" Mitchell asked. "Are we going to have a raft of 49-person firms as you've seen in France? So they stay under the 50-person ceiling? Are you going to have an explosion in people working 29 hours to stay under the 30 hours (triggering additional requirements)."
    Housing has been highly affordable and employment is rising. Combined, that has changed the ability of younger generations to form households.
    "When you talk about roughly a one-third decline nationally in price combined with the lowest mortgage rates we have ever seen, affordability soars," Mitchell said. "Prior to the recession, the growth rate of households in the United States was about 11/2; million per year, (then) it dropped about half a million.
    "Think about that, that's a million households not formed. Where'd those people go? Well, they graduated from college and moved back home or stayed with roommates, whatever; but households were not formed. Now that you've got employment again, household formation has picked up."
    He said the Federal Reserve anticipates growth in the gross domestic product — the sum of all goods and services in the economy — to grow between 2.3 percent and 3 percent this year, followed by 3 to 3.5 percent growth in 2014.
    "What does that say? It says continued, slow upturn," Mitchell said. "You think back to recoveries from other serious recessions. You may have seen growth rates of 5, 6, 7 percent. That's not what we're talking about now; we're talking about more modest expansion."
    But there still are economic drags resulting from policy decisions and economic issues overseas that will have an impact on U.S. performance.
    "How are we going to deal with those debt-ceiling issues?" he asked. "How do we unwind this monetary stimulus? The Fed balance sheet continues to explode. The Fed is buying bonds. When the Fed stops buying those bonds, we may get a real surprise with interest rates."
    Mitchell said uncertainty has been reduced but a laundry list of issues will shape 2013, including falling debt burdens, housing strength, rising income and employment, corporate balance sheet strength and financial institution strength.
    "The debt ceiling stuff, the sequesters, we don't know," he said. "There are still significant risks."
    He predicted a more conservative growth rate of 2 percent, lower than the Fed suggests for the coming year.
    "But you have to have your fingers crossed, the policymakers don't screw up." Mitchell said. "Our fiscal situation is absolutely unsustainable.
    "With an aging population and questions about innovation, do we have the ability to grow as we have in the past?"
    He said long-term spending issues have not been addressed and the debt ceiling remains unresolved.
    "There are two problems," he said "There's a short-term problem of weakness, and there's long-term problem of unfunded liabilities. The short-term problem is 7.8 percent unemployment (nationally), a lot of people unemployed for a lot of time. The long-term problem is promises we've made that are not funded. We don't have any trouble now borrowing, but the problem is down the road. It's not clear what the president and Congress are going to do."
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