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7 Economic Surprises for 2013

Jason Stipp
Robert Johnson, CFA

Jason Stipp: I'm Jason Stipp for Morningstar. If you thought 2012 held a few surprises for investors, just wait for 2013, says Morningstar's Bob Johnson, our director of economic analysis. He is here today to explain. Thanks for joining me Bob,

Bob Johnson: Great to be here.

Stipp: So, you say that there could be in 2013 not necessarily surprises for investors but at least potential surprises on the economic front.

You have a few of these, some of them are kind of related to each other, but let's start with the first one. It's the Federal Reserve. You said that Fed may tighten sooner than we expected. Do you think that Fed is going to start tightening in 2013?

Johnson: Well, you know what, I think by the end of the year that there will be talk of it, and there's several reasons for that. One is, I think the economy has picked up just a little bit of steam as we've seen. We've now seen from the Fed minutes that there are some disagreement about, "Should we be doing more of these bond buying or not, or maybe we've done a little bit too much." And I think they built in a little bit of extra for the fiscal cliff, and I think now they're maybe having a little regret and maybe by the end of the year things will lighten up. Really the biggest reason I'm thinking they might tighten a little bit or think about tightening or it be in the headlines is, by the end of the year, I'm thinking we may be down to 7% to 7.2% unemployment.

Stipp: So, this is surprise number two by the way. You think that we might reach a 7% unemployment rate by the end of the year. What's going to drive that?

Johnson: Yes. I think the key driver in that is going to be that we're going to have employment growth about where it's been, and we're not to going to add quite as many people to the workforce in the year ahead. I think we forget--everybody says let's just take population growth--but you really have to think about that mix of people between 22 and 62 that are the primary working age. That group actually in the year ahead begins to get really tight. We start to actually begin shrinking as the baby boomers begin retiring. So, again, the population goes up some, but the baby boomer retirement means that each year the number of people looking for work is going to be just a little bit smaller.

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Stipp: Potential surprise number three is something else that you look at that's part of those employment reports which is wages.

So, you like to see new people added to the job roles, you like to see wages go up, and you like to see hours worked go up. You think wages, which have been somewhat anemic in 2012, will start to look a little better in 2013. Why is that?

Johnson: Yeah. I think there are a couple of reasons that wages will start to look better. I think one is, we've talked about the housing industry getting better, and we'll talk some more about that. But I think people were locked in geographically because they couldn't sell their homes. And a lot of the really big salary gains comes when people say, "Well, I am going over here," or like right now there's a shortage of certain people in San Francisco or whatever. But nobody would move from Cleveland to get there or whatever to get the higher wage because they couldn't sell their house in Cleveland.

I think that that has begun to reverse itself a little bit. The unemployment rate for college-educated and above is now well under 5%, and so, I think certainly that market is a little tighter than it was, and even in things like construction we're hearing there's a shortage of some workers on some construction sites.

So, I think that some of those spot things get a little broader in the year ahead, and also I think retail is going to be a little bit weaker in 2013 in certain categories, that is. And those are typically lower-wage jobs. Construction is typically higher-wage, and I think they'll do a little bit better. Retail will do a little reverse. So, we're going to have a little bit of a mix. We've got the greater mobility, and we've got the relatively low unemployment rate for college-educated and above.

Stipp: So, one of the key things in helping people be more mobile is that their home values start to reflect what they see is closure to reality and what their homes are worth. We've had a good year for home prices in 2012, but you think we will have a good year in 2013 as well, and it could surprise some people by being up as much you think as 8% in 2013. So, home prices have a good year coming ahead after a good year in 2012.

Johnson: Right and to put some perspective on it, it'd be a month or two before we know, but we'll end up with somewhere between a 5% and 6% [increase] in the housing prices in 2012, which was really one of the big shocks of last year, one that we thought might be there, but not that magnitude.

I think it may even be a little bit more in the 7% to 8% range in 2013. There is going to be a little bit of an interaction here. Kind of that range assumes that we don't increase construction all that much, that housing starts maybe are just under 1 million, up from say 750,000 in 2012. But if prices go up, or if we don't get new home starts and prices will go up more than that 7% to 8%, or for some reason people don't start building more houses, that means the prices of ones that are already there are going to begin to go up.

Stipp: Another thing, and you mentioned this as well, is retail as an area that you are going to be paying close attention to in 2013 for obvious reason, the consumer. But you say that retail construction itself might hit a snag, and retail hiring, you already mentioned, could hit a snag because of the move to online.

My question for you is, if retail faces some headwinds, brick and mortar because of online, is that necessarily a bad thing? Do you care so long as consumers are out there spending whether it's online or in stores?

Johnson: Well, I do and just a couple of ways. One the number that will weigh on a little bit, will put a little bit of lid on is the employment growth because a lot of the growth we've got in employment in 2012 was on the retail side. And if that hits a little bit more of a snag as more of that moves online--online because of the efficiencies doesn't take quite as many people as a store-based model--it would weigh a little bit on the employment. But now again, those are a little bit lower-paying jobs, lower-hour jobs. So, again, I don't want to see any category get hurt. But that one will probably put a little bit of a lid on things in the year ahead.

I think it's not only the move to online, which is going to weigh on retail. I think as the housing market comes back that people are going to be buying more furniture things and you are going to see different remodeling categories and things like wood and things like that go up. And maybe some of the cheap trinkets, if you will, you know, the handbags, the shoes and maybe even some of the apparel items--people didn't want to go make the big car purchase or the big house purchase, so heck I might a little treat myself and buy myself a really nice purse or a really nice pair of shoes or whatever--that this year maybe they'll say, I'm going to do the remodeling job instead.

Stipp: So, a little shift in focus?

Johnson: So a little bit shift in focus, which may make some of the retail numbers I conventionally look at, look a little softer in the year ahead.

Stipp: So that's my question for you. If we see different types of spending online or on different categories, will that get captured in some of the big reports that we see on retail sales, or how should we make sure that we're accounting for all the spending, if it's not happening in some of the traditional categories?

Johnson: The government does a pretty good job on their monthly report, but unfortunately remember that's the last of the retail sales reports. That's the more comprehensive of all the reports. But in some of the shopping-center data I get--because the malls tend not to have furniture stores, they tend to be a little bit more of a stand-alone business--[the different types of spending] may not turn up there. The Home Depots and Lowe's and those types of folks aren't in the International Council of Shopping Centers' database. So, those are things that will trip up some of our retail metrics in the year ahead, but not all.

Stipp: When you're looking at retail be sure that you get a wider purview if you really want to get a sense of the health of consumer spending; it will be important in the year ahead. Another one is in the energy industry, natural gas which is had a lot of headwinds on it. You think we might see some bottoming in natural gas. We've already had a pretty mild winter so far. Do you think natural gas has got better days ahead?

Johnson: Yeah, I think that because of the warm winter, at least what we've had so far, it certainly impacted prices so far, and I think people have this attitude of "There is more fracing; we got an infinite supply of this stuff; and now climate change is going to go on forever; it's getting warmer every year; and we're going to use less gas." I think that misses a few things there. It maybe on some level works, but the drillers have been cutting back. Some particular companies have cut back as much as half on the number of rigs that they've got out there doing gas.

I think that we certainly are tightening up the supply, and right now you can't really see it because we have had a warm winter which has kept the demand down a little bit. But I mean if we get in this warm cycle in the summer, obviously that means more demand for gas, and so warm weather actually helps in that part of the cycle. And so I think that between the decrease in the drilling, some interest in exporting some of the gas, and as we move into the warmer summer months or if winter becomes a little bit more normal, even we just hit one or two cold spells, I think that the natural gas prices could begin acting better and that maybe the cheapest days of natural gas are over.

Stipp: So, a lot of things going natural gas' way. Even if weather doesn't, there are still a lot of tailwinds for it to do better. The last one, Bob, you say that trade gap should narrow and the dollar should strengthen. What's your case about international trade and the currency effects that you see going forward?

Johnson: Again, a lot of these things kind of all tie back to each other, but with housing doing better, that means there is less spending on apparel and maybe even computers and a few other things, and that more of the spending goes toward lumber, drywall, things that are typically more made in this country. That will slow the imports more than one might expect in the economy from where it otherwise it might be. And [there is also] this whole oil and gas boom that we've kind of seen in this country, every year we're importing a little bit less and every year we sell a few more Priuses and other hybrid cars and bring up that average gas mileage. And energy used to be a horrible headwind for the trade deficit, and it was almost impossible to think it could ever go away. But now it looks like it's going to be a little bit more of a help as we move forward. So, that's the main reason.

Stipp: How does the dollar factor into that? Does that somehow make the dollar stronger with some of these effects?

Johnson: Yeah, generally the higher your trade deficit, the weaker your currency. And so I think that now we're going the other way, or at least a contained [level] or at least the same as-a-percentage-of-GDP-type of deficit number in terms of trade deficit. That actually usually means the dollar gets stronger, not weaker.

Stipp: Some great insights for what we may see in 2013. I'll be checking in with you, of course, throughout the year to see how things are playing out, but thanks for giving us some of those forecasts today.

Johnson: Thank you.

Stipp: For Morningstar, I am Jason Stipp. Thanks for watching.