THE BLOG
12/31/2012 09:02 am ET Updated Mar 02, 2013

Slowdown

The U.S. economy is slowing sharply.

Wall Street pundits are engaged in a lot of happy talk these days about how the economy is strengthening, promising a strong recovery into 2013. Several economists confidently forecast that the Gross Domestic Product (GDP) growth next year will hit 3 percent or more. They anticipate a substantial increase in consumer spending will help sustain the rebounds in housing and autos, and an improvement in household net worth. The latest improvement in the unemployment rate, down two ticks to 7.7 percent, despite the impact of Hurricane Sandy, would appear to support this optimism.

But while these are positives, to me the fundamentals of the economy in the 3rd quarter were not at all encouraging and will lead to a further slowdown in GDP in the 4th quarter and early next year.

It is true that the revised GDP for the 3rd quarter advanced at an annual rate of 3.1 percent, up from the previous reported 2 percent gain. But the factors that led to the upward revision in GDP -- growing inventories, higher federal spending and robust exports -- are not likely to continue. Inventory rebuilding alone accounted for almost 1 percent of 3rd quarter GDP. Given the impact of Sandy, and the heavy discounting by retailers, it's doubtful that consumer spending will hold up in the 4th quarter. In fact, consumer sales for the holiday season only increased 0.7 percent, the lowest increase since 2008, and the University of Michigan consumer sentiment dropped 10 points in December to a five-month low.

My greatest concern is that the GDP numbers reflect the fact that U.S. companies are continuing to hold back on their investment spending because of weak global demand and also because of the uncertainty associated with progress on averting the so-called the fiscal cliff. After growing almost 5 percent in the first six months of 2012, business investment fell 2 percent in the last quarter. Everywhere I go, I hear CEOs talking about cutting back on investment and orders because of the uncertainty over the budget and higher taxes.

You also see the economy slowing in the manufacturing sector and exports. The November ISM for manufacturing showed a decline to 49.5 percent, which is the lowest level in three years. Much of this reflects U.S. exports, which have been slowing for the last several quarters, largely because of the recession in Europe. The National Association of Manufacturers (NAM) fourth quarter survey found 84 percent of manufacturers say the political uncertainty associated with the fiscal cliff and sequestration was their biggest concern.

In sum, we're looking at the fundamentals of the economy generating roughly 1.5 percent GDP growth for this quarter. The continued likelihood that the fiscal cliff discussions will not be productive, either because action is taken only after confidence has been further ruptured, or that the fiscal constraints will drag down the economy further, could well drag the economy into negative growth in the 1st quarter.

Jerry Jasinowski, an economist and author, served as President of the National Association of Manufacturers for 14 years and later The Manufacturing Institute. Jerry is available for speaking engagements.