Fri, 3 Jan 2014
Autos and housing might not be the contributors some expect this year, and fiscal policies could continue to be a drag, says Morningstar's Bob Johnson.
Jason Stipp: I'm Jason Stipp for Morningstar.
The bulls are building a case for stronger GDP in 2014, but Morningstar's Bob Johnson, our director of economic analysis, says not so fast. He's here with us to explain today.
Thanks for joining me, Bob.
Bob Johnson: Great to be here.
Stipp: You said that the bulls have not an insensible case for stronger GDP in 2014. What are the optimists saying about next year and why they think it will be better than this year?
Johnson: It's a pretty straightforward case. We probably ended up growing in 2013 at about 2.3%, which is a pretty healthy rate, and then from that rate they say we had about a 1% to 1.5% fiscal drag from the payroll tax, from the budget deals, and so forth, that really brought tightness into the market. [As those effects dissipate,] that will add about 1% to 1.5% to next year's numbers. So they say we'll be at 3.3%-3.5%.
On top of it, if you say housing and autos will continue to roll along like they have been and maybe exports aren't quite the drag they were, you can get to maybe even 3.5% growth next year, but I think that's a little bit too strong.
Stipp: The bulls are saying 3% to 3.5%, and a big part of that, as you were explaining, is the government fiscal cliff and the fiscal tightness that we saw this year--some of that won't be happening next year because of that recent budget deal. So [the bulls] are expecting to see that government won't be as big of a drag as it was this year.
Johnson: I think it will be a smaller drag, but there were some other things the government is doing that may hurt, too.
Stipp: You say that [the bull case] is not entirely insensible, but there are also some worry list items that you might want to keep in mind, that could actually be headwinds for that stronger growth than they expect. Let's walk through some of them.
Autos have been a big contributor in 2013, but you say that autos might be reaching that peak level for 2014.
Johnson: We've already gotten pretty close to our last high, which was about 17 million autos a year. We're at 16.3 or 16.4 million for next year. And the year-over-year growth rates have really slowed down dramatically. We've gone from 9 million units at the worse month of the recession to something that looks more like 16-16.5 million at current rates. So, we've clearly had the big pop already. For people who are anticipating that we're going to get even more of that next year, it isn't going to come.
Then there is one other aspect of it that's inventory-related. Looking at cars only, inventories have gone from the 60 days or so range up to something that looks more like 80 days over the last couple of years. Inventories have built up rather substantially. So not only have we had decent growth in cars, but the automakers with increased confidence, new models coming online, and the tsunami built up their inventories...
Stipp: That helps GDP when inventories build.
Johnson: That helps because we're talking about production. So whether that item gets sold or whether it gets put in inventory, it gets counted in GDP.
Well, next year, I don't think they'll be building inventory the same way that they have over the last year. In fact, they may actually drain some of that inventory down.
Stipp: You say that inventories even across durable goods have started to build, so that has been a tailwind that we might not see next year, even beyond autos.
Johnson: We've had a couple of great quarters for inventory-building, which is good and bad. It helped the GDP number, it help production, it help put people back to work, so that's the really good news.
On the other hand, if all the consumption doesn't come to bear, then next year those inventories might come down and be a negative effect on GDP.
Stipp: The housing market is something that the optimists are also pointing to as a bright spot in the economy, and I think housing has been, in general, a bright spot for the recovery. But you say that you should check your expectations for housing in 2014.
Johnson: People who are expecting wild acceleration next year in housing, that it's going to suddenly be this really big contributor to the number, that's not likely. In fact, it may turn out to actually be not as big of a help in 2014 as it was in 2013.
A big part of that probably has to do with existing home sales, which I usually don't talk about too much. The National Association of Realtors is saying that existing home sales might basically be flat between 2013 and 2014, which is highly unusual. Existing home sales pull through furniture and brokerage transactions, mortgage transactions--and those will not be accelerating, if [NAR] is right, in 2014, and that was a big contributor to the housing market in 2013. So, that's going to be a headwind, and with higher rates and some of the numbers we're seeing in permits and so forth, I'm not so sure that even new home sales are going to be all that much of a bigger kick than they were in 2013.
Stipp: Last thing on your worry list, let's turn again and talk about the government and why we might not see all of that government drag turn around in 2014. There are a few reasons.
One of them are some expiring programs that have helped consumption and GDP that we might not see in 2014.
Johnson: Absolutely right. I'm hopeful that we will get some of these back, so we may revisit this is as soon as a month, but right now the extended unemployment, which was up at one point to as many as 99 weeks, has affectively gone away for 1.3 million people who were collecting it as of Dec. 28. That can be retroactively restated, which frequently does happen, but right now those people who were over the time limits will not get that next check.
Stipp: That's money that tends to go right back into the economy when they receive it.
Johnson: Straight back into the economy.
Stipp: The Food Stamp Program is also something that we might see touched again by Congress, but as of right now, some people won't be getting [the same amount of] food stamps that they were getting in 2013?
Johnson: What happened with the Food Stamp Program is that they actually cut back the levels for the 43 million people that were collecting food stamps. They had boosted the amount that you could get with the stimulus package way back in 2009, and now they've said, we're going back to those old levels as of Nov. 1.
We already saw some of the grocery store sales and some of the low-end retailers getting hit back in November by this. But unless [Congress goes] back and reinstates this money, which we all thought there would be at least some agreement on, then that's going to continue to weigh on the numbers.
Stipp: Also, there were some tax provisions that might have stimulated consumption in 2013 that we might not see in 2014?
Johnson: That's correct. That's going to be on the business side of the equation, and especially we're going to see it more in the first half. A lot of people rush to take advantage of tax credits. If you could take the tax credit in December or January, you'd rather take it in December, so you can get your 2013 taxes [reduced].
On top of that, there are some expiring provisions that make it a little better if you took your deduction in 2013. Those things all helped 2013 a little bit but will weigh on the numbers in 2014. That will be on the business spending side. Business spending has looked a little better, especially on the durable goods part, in the last couple of months, and I hope that isn't artificial and [doesn't go] away in January.
Stipp: If you are expecting the Affordable Care Act to be a big boost to GDP next year, it's more complicated than that.
Johnson: For calculation purposes, I'm considering it a wash. The good news is, there is going to be a lot of people running to medical facilities starting Jan. 1, now that they are insured, and that will certainly help some of the numbers.
But on the other hand, there are some things weighing on it, too. Some of the taxes that go there will be higher. Also, premiums for insurance will be higher next year, deductibles on most people's policies will be higher next year. Those will weigh on the numbers a little bit. There was also a big push at the end of the year for people before they had to switch doctors, [which] might have been required by the Affordable Care Act, to [see their prior doctors] in December. So that may hurt a little bit [in 2014], too.
Net, I think the Affordable Care Act will end up being a wash next year, but we'll have to keep eye on that.
Stipp: One wild card item that could have an impact in a certain way, maybe a negative way, is the weather. How does that potentially play through with the weather we've seen so far?
Johnson: That gets to be a tough one. Short term, weather may actually help. We already saw some of the November numbers look a little higher for consumption growth, because of the utilities. People began to use more gas because it was so much colder this year than last year, and December was even worse. So, that will tend to help some of the production numbers, especially utility numbers, that flow through.
But then those bills show up a month later, and they may have to be paid a month after that. So you've got a 60- to 90-day grace period, where [the economy] gets all the benefits of the utilities doing better, but it doesn't really show up in the consumers' pocketbook yet. But then in February and March, when those bills have to be paid, if [consumers] are spending more money on fuel oil and on home heating, that means less money to spend everywhere else. That could be something that really begins to weigh on the numbers. We've had a couple of years of very, very mild winter. This year could be one where the numbers really get hurt by the colder weather.
Stipp: If it's a lot colder, some of the construction and other activity that you might see earlier in the year of a milder winter might have to be pushed off as well?
Johnson: Exactly. That will make some of the year-over-year housing numbers, in particular, look worse in January, February, and March.
Stipp: Bob if the optimists are saying 3% or maybe even 3.5%, given this worry list that you have, which isn't necessarily a short list, what do you think is a more reasonable number for 2014 GDP?
Johnson: I think we're going to stay in the same course of 2% to 2.5% growth that we've seen for the last few years. I will say, I'm a little bit more at the high end [of that range] right now; 2.25% to 2.5% is where I think we'll probably come in. But it all depends on how the Affordable Care Act shakes out, how the weather shakes out. There is a lot of uncertainty yet, but at least we've taken away some of the fiscal uncertainty and some of the tapering uncertainty that have been weighing on the market for so long. So I'm optimistic.
Stipp: Bob, a balanced picture on the economy. Thanks for joining me.
Johnson: Thank you.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.