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By Jason Stipp and Robert Johnson, CFA | 01-23-2013 03:00 PM

5 Risks for the Economy in 2013

Morningstar director of economic analysis Bob Johnson will be keeping a close eye on these potential headwinds in the year ahead.

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Jason Stipp: I'm Jason Stipp for Morningstar. Our director of economic analysis Bob Johnson has talked before about what will be the drivers of the economy in 2013, but what about those red and yellow flags that should be on your radar?

Taking a glass-half-empty approach today, we're checking in with Bob to hear about some of those risk factors.

Thanks for joining me, Bob.

Bob Johnson: Great to be here.

Stipp: You've got five of them--things that should be on our radar as warnings or risk factors for the economy in 2013. The first one is not going to be a big surprise to anyone--you've talked about it before as being "the recovery killer." It's inflation. Why should inflation be on our radars? What are some of the pressure points there?

Johnson: First of all, the key number to watch is the CPI, and seeing what it is year-over-year on a three-month average. When we get over 4%, that has typically thrown us in a recession every time. And maybe there was a war or maybe there was a housing boom or something before it, but the thing that immediately proceeds and most directly forecasts a recession is a spike in inflation up to that 4% level, and it's worked like clockwork many times, and it's a warning signal we should never ignore.

The good news is that metric right now is at 1.9%. So, we're relatively safe.

Stipp: So we have some breathing room, but there are some specific underlying factors that lead to inflation that you are keeping a close eye on. And the first one is natural gas. And we've got … more natural gas production than we've had in the past in the U.S. Are natural gas prices headed higher, that you're worried about them?

Johnson: Well, I am worried about them because they are a meaningful part of consumer spending. It's kind of replaced fuel oil as a fuel-in-the-home choice, and so it's in everybody's budget. And the issue with natural gas right now is that we've finally had a more normal winter, where it's actually been cold, and it's finally driven up demand for natural gas a little bit.

At the same time, the drillers have at least temporarily put a little bit of a lid on drilling new holes right now because there's not a lot of demand out there and the prices are so low.

So, I think it's a problem that probably would correct itself. If prices get too high, then we'll see more drilling again. But on the other hand, I am a little bit worried right now that the days of cheap, cheap, cheap natural gas are probably behind us.

Stipp: What about gasoline that you put in your car? Are we seeing pressure on those prices?

Johnson: Yes, there will be two things pressuring that. I think with all the situations we've seen overseas, in Africa, and so forth in the last few weeks, certainly there's been a little bit of a spike in crude oil prices, and as the economies around the world have begun to pick up a little bit, too, those things have combined. So, [crude oil prices] are back up again in terms of the raw material, the crude oil, that goes into gasoline.

So far, gasoline prices haven't spiked yet; it hasn't worked its way through the refinery chain just yet. So, I'm afraid that the gasoline spike is yet to come, and will come like it has every spring for the last two or three [years].

Stipp: And a wild card--one that we were concerned about in 2012--is food, because lots of different factors can cause food prices to go up. It didn't hurt us as bad, maybe, as some feared in 2012. What's the outlook for 2013 on food inflation?

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