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By Christine Benz | 02-22-2013 09:00 AM

Debating the Economy's Comfort Level

St. Louis Fed economist Kevin Kliesen weighs the tailwinds of consumer spending, a housing recovery, and corporate cash hoards against the headwinds of increased payroll taxes and slowing income growth.

Christine Benz: Hi, I am Christine Benz for Morningstar.com. I recently attended the Morningstar Ibbotson Conference and had the opportunity to sit down with Kevin Kliesen. He is a research officer and business economist with the Federal Reserve Bank of St. Louis, and he discussed his outlook for the economy.

Kevin, thank you so much for being here.

Kliesen: Thanks, Christine.

Benz: Before we get into this interview, we first want to clarify that any views that you will express in the course of this interview will be your own views and not those of the St. Louis Federal Reserve Bank.

Kliesen: Yes.

Benz: In your presentation this morning, Kevin, you were cautiously optimistic about the U.S. economy for the rest of 2013. Let's talk about your views on that topic, and specifically, let's start with business spending. You think that there is a reason for some optimism there.

Kliesen: Yeah, I think you can build a case for stronger growth this year than what we saw last year. I think the economy naturally wants to sort of go back to where it's comfortable with. And with the economy, we can debate on where that comfort level is, but as some of the uncertainties that we have seen in the past few years kind of abate and ebb away, then obviously businesses will become a little bit more confident. They have a lot of cash on their balance sheets to put to work. As these uncertainties wear away, then I think [companies] will become more comfortable investing in machines and equipment and hiring more workers, as well.

Benz: Another area that you discussed in the presentation was the area of consumer spending. It had until recently been a relatively strong part of the economic recovery. More recently, though, we've seen some signs of consumer weakness. Let's talk about your thoughts on that sector.

Kliesen: Yes, consumer spending is the largest part of gross domestic product; as consumer spending goes, generally the economy is going to follow. So it finished 2012 on a reasonably sound note. Some of the signs this year are a little bit weak. You have the payroll tax, obviously; you have higher gasoline prices. So there is some cause for a concern, but at the same time some of the fundamentals of consumer spending are improving. The labor market seems to be improving, stock prices are going up, and housing prices are going up. You have some of these tensions at work, but I think on balance, economists expect consumers to continue to spend at a reasonable rate.

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