While we don’t have a crystal ball to predict this year’s economic outlook, Chicago has Mesirow Financial’s Chief Economist Diane Swonk to give us her predictions based on research, hard evidence and intellectual thought. “This is the hardest outlook I’ve ever had to write,” she admits. “It’s going to be very interesting.” So, here are Ms. Swonk’s thoughts: the good, the bad and the ugly.
Why is 2013 the most difficult outlook to write?
Because of political uncertainty and fiscal policy. We have a choice to get on a more sustainable, long-term growth path that could actually raise potential growth by not only being more fiscally responsible, but also by changing the tax code, gaining efficiencies, and changing the way entitlements are done. We have two extremes in parties that are both willing, for political gain, to risk ‘Economic Armageddon.’ The fact that people think there’s something to be politically gained by doing that is unconscionable to me.
What can you say about the economy in recent years?
We nearly wiped out all of our capitol in our economy. We’re lucky we didn’t go into another Great Depression, and we can thank the Federal Reserve Bank and the Troubled Asset Relief Program for that. Decisions were being made within hours. Not all of them were perfect, but the system was falling apart quite rapidly. We also don’t have credit because a large part of our capitol system was wiped out.
We’ve got subpar growth with an increased level of uncertainly and hesitation. Corporations were hesitating and you don’t want that hesitation to become a full contraction. Hesitation as it is presses growth, but then you add on top of it an actual pullback, which causes a shattering of confidence. Consumer confidence meets up with corporate confidence, and they both go down because you start cutting jobs. What we’d rather see is that we have certainty and a roadmap. We need a more sustainable fiscal path and sustainable economic path to maintain influence over the rest of the world. This is not out of our reach.
And the economy now?
I think 2013 could be a real tipping point. That doesn’t mean it’s going to be easy for equities or market gains. There’s going to be a lot of uncertainty in the first six months of the year. We only hope they can find the light. Many people argue that it takes a crisis to get these things done. Well, we’re pretty close to a (self-made) crisis. I hope they are right, and I hope it doesn’t come down to a game of chicken at the beginning of the year. Even letting it go unresolved and letting the tax situation kick in, the IRS will probably step in and say until something is done, keep up with the current withholding rates. Corporations make adjustments. You can’t have holding rates and you can’t just all-of-a-sudden not know what the tax rates are going to be. You tend to have much more tax fraud in that environment. There is a lot of opportunity for distortions in the economy that are unproductive. The crisis in confidence could be a self-fulfilling prophecy if they play a game of chicken. It’s international and national. I’m working on a piece that indicates domestic policy is foreign policy. Corporations do have an impact because they have jobs, and at the end of the day jobs are what really matter. Finally, corporate America is a think tank. The dirt is always in the details.
Describe the situation in Illinois.
Illinois had the benefit of being in the manufacturing sector and was benefiting from exports picking up. Investments really matter to Illinois. The state makes heavy equipment and construction equipment. The housing market coming back would be an important offset to the exports not doing as well. Mexico is doing extremely well and is a great trading partner of the U.S., which also has great influence in Illinois because here’s a high population of Mexicans.
Will any particular markets rise?
Real estate. The housing market is starting to stabilize and improve unevenly, from a low level, but prices going up instead of down is a game changer. The National Association for Realtors has estimated that we restored some $790 billion dollars in equity in homes, which is only a small dent in what we lost. However, moving in that direction has raised consumer confidence and the willingness for people to remodel. They are now willing to list their home and upgrade what they’ve got, where before they weren’t willing to put anything into it. It’s a game changer in terms of momentum and the economy.
Any investing advice?
There’s no shame in asking for help. I get help in choosing my stocks. As an economist, I have more influence in choosing my stocks because I put my money where my mouth is. The hard part right now is not knowing where the economy is going. Understanding policy is key to understanding the economy. Also, it’s important you invest early and young.