The U.S. Economic Month at a Glance: January 4, 2013
A last-minute deal by Congress prevented the United States economy from tumbling over the so-called fiscal cliff to start this year. The deal will at least enable the economy to avoid slipping into recession in 2013. However, much work needs to be done by both the White House and Congress in order to set the U.S. economy on a sustainable fiscal path over the long term. In other developments, manufacturing activity rebounded at the end of last year and housing markets continued to expand. On the downside, consumer confidence slumped in December.
The U.S. economy managed to avoid going over the much talked-about fiscal cliff when Congress finally reached an agreement early in the new year. Under the deal, taxes will increase only for those individuals making more than $400,000 per year (around 2 per cent of the U.S. population), while unemployment benefits for the long-term unemployed will be extended for another year. Taxes on long-term capital gains and dividends for the wealthy will also increase. President Barack Obama had wanted a tax hike for anyone earning more than $250,000 a year, while the Republicans had threatened to use their majority in the House of Representatives to block any increase in personal income taxes for anyone except those earning more than $1 million per year.
While the agreement will enable the economy to continue expanding at a modest pace this year, the country’s fiscal problems are far from over. Congress delayed until March making a decision on the automatic spending cuts of around $100 billion that are set for 2013. We expect that an agreement will be reached and that it will include less drastic cuts so as to ensure that the economy keeps growing over the near term. Policy-makers must also come up with an agreement on dealing with the debt ceiling by the end of February. The ceiling, which is currently around $16 trillion, must be increased to enable the Treasury to borrow enough money to make up the difference between what the federal government spends and what it obtains in revenue.
Manufacturing activity rebounded at the end of last year and housing markets continued to expand.
Manufacturing picked up steam in December. The Institute for Supply Management’s index of activity increased to 50.7, up from 49.5 in November. A reading above 50 indicates that manufacturing activity is increasing. Part of the gain was payback for Hurricane Sandy, which disrupted manufacturing in the Northeast in November. The new orders component of the index has remained stuck in neutral since September, likely because of the uncertainty created by the impasse in Washington over the future direction of fiscal policy. A partial solution to the impasse should result in larger gains in manufacturing activity over the near term.
The drawn-out negotiations on how to deal with the fiscal cliff had a negative effect on consumer confidence in December. The Conference Board Inc.’s index of consumer sentiment slumped to 65.1, down from 71.5 in November. Households were clearly worried about looming tax increases that would have taken effect in 2013 had the White House and Congress not reached an agreement. Now that a deal has been reached and personal income taxes will not increase for the vast majority of American families, confidence should gradually improve as the year unfolds.
The latest job numbers should also put households in a somewhat better mood. In December, the economy created 155,000 new positions, while the unemployment rate stands at 7.8 per cent. Some of the largest gains were in the construction industry, where 30,000 new jobs were added (many a result of the rebuilding efforts in the Northeast following Hurricane Sandy). The education and health care sectors generated 65,000 new positions in December. Now that at least some of the uncertainty surrounding fiscal policy has been alleviated, the jobs picture should continue to improve in 2013 as employers ramp up their hiring to meet rising domestic demand. A reduction in the pace of government layoffs will also help the overall employment situation.