A Recession is Not in the Cards
but Subdued Trade Show Grow Is
Oceanside, CA – After two months of daily warnings about national economic calamity unless the fiscal cliff issues were resolved, the noisy ordeal ended in a whimper with the problem essentially being kicked two months down the road. “The incompetence of America’s political leaders were on full display,” said Frank Chow, chief economist for Trade Show Executive Media Group. “With the economy treading water and mired in more than $16 trillion in federal debt, a compromise deal got taxpayers modestly higher payroll taxes, tiny spending cuts, $64 billion in tax pork, and sadly no reform.”
And . . . the debt ceiling decision is postponed until April. The Democrats are asking for $1 trillion more in taxes, while Republicans are demanding real spending cuts. “As a result, we are at the exact same place when the clamor about the fiscal cliff first started,” said Chow. “This is a shame because the economy is showing signs of renewal and could use some support.”
Even though the government essentially did very little, the financial markets responded positively to the stalemate. Investors and companies breathed a sigh of relief that future economic prospects are relatively unscathed as the two political parties neutralize each other. Chow said this pattern of governing will likely persist when eventually addressing sequestration (mandatory spending cuts), the debt ceiling, and the expiration of government funding later in 2013.
Many tax experts and analysts suspect any true constructive reform in 2013 has faded for a needed overhaul of our tax system or addressing the burgeoning budget deficit and the long-term viability of Medicare and Social Security. "I suspect the deal has reduced the odds of fundamental tax reform this year," said Donald Marron, director of the Tax Policy Center and former senior economic adviser to President George W. Bush.
Despite the government’s failings, the economy exhibited some encouraging signs of growth towards the end of last year:
- December industrial production rose 0.3% from November and at an annual rate of 1% for the Fourth Quarter. Though not particularly impressive, it occurred in the face of super storm Sandy and a recession in Europe, and provides evidence of low but steady growth.
- Retail sales for December climbed 0.5% which beat expectations and was the largest gain in three months, reflecting momentum in consumer spending at year-end.
- The NAHB/Wells Fargo Housing Market Index, which measures single-family builder confidence, rose for the eighth straight month to 47 in December and has remained there through January.
- Single-family construction starts rose 8.1% to a seasonally adjusted annual rate of 616,000 units in December, while multi-family production jumped 23.1% to 338,000 units.
- Payroll employment increased by 155,000 in December and the unemployment rate held steady at 7.8%. This is consistent with the monthly average jobs gain of 153,000 for all of 2012.
Why Housing Offers the Keys to a Robust Recovery
Ironically, the housing industry, along with oil and gas drilling, may be the economy’s best bet for a more robust recovery, said Chow. With continual improvements in construction and prices throughout 2012, home building is once again contributing to economic growth. In the Third Quarter, home building was responsible for 10% of the total GDP growth of 3.1%. “This is remarkable, given it is only 2.7% of the entire economy,” Chow pointed out. He said the National Association of Home Builders (NAHB) December Housing Starts report, which showed the highest level of new home production since June 2008, confirms the continuation of this trend. Also, the NAHB/First American Improving Markets Index (IMI) for January added a net 41 more markets to the 201 in December. The total of 242 represents two-thirds of all eligible metro areas. A metro area makes the IMI list if these three indicators improve for at least six months: single-family housing permits, employment and home prices.
With the Federal Reserve keeping interest rates at historical lows, the biggest threat to the upbeat housing trend is the possible elimination of the mortgage interest deduction when sequestration talks resume in Congress. Already, the fiscal deal reinstated the Pease itemized deduction phase-out. This rule will limit the value of itemized total deductions, for taxpayers above $300,000 in adjusted gross income ($250,000 if single), to three cents for every dollar above the threshold amounts. “This rule should have only a small effect on housing demand,” said Chow. “However, its reinstatement suggests policymakers are eyeing itemized deductions, like the mortgage interest, as potential revenue raisers.”
The fiscal deal also saw the expiration of the payroll tax holiday. Some analysts estimate the tax increase, which funds Social Security, would reduce disposable income by $120 billion this year, with the average American household having $18 to $20 less to spend each week, or $900 to $1,000 a year. With the economy likely growing about 1.0% in the First Quarter, according to a Wells Forgo U.S. economic forecast, just the prospects of further tax hikes or big spending cuts will cause consumers and businesses to remain cautious about spending, Chow warned.
Two Early Threats to the Economy in 2013
For small businesses, an imminent risk is excessive regulations. According to Thomas Donohue, president and CEO of the U.S. Chamber of Commerce, the new health care law is creating “extraordinary confusion” for businesses as they try to comply with the complicated rules and could drive costs through the roof. [Note: A webinar on the requirements and expected impacts of the U.S. Affordable Care Act, dubbed “Obamacare,” will be presented February 25 by the Exhibition Services & Contractors Association (ESCA) and the human resources consulting firm SESCO Management Consultants and sponsored by Trade Show Executive. To register, contact Mitt Arnaudet at (972) 447-8212 or firstname.lastname@example.org]
As we highlighted in our column last September, about 4,000 new regulations are issued each year — this is a regulatory flood. Businesses are facing a possible deluge this year since only one-third of the 447 regulations mandated by the Dodd-Frank financial regulation act have been implemented. Congress is expected to act soon on the remaining rules.
The Mississippi River record drought hasn’t gotten much nationwide press coverage, said Chow, but it has the potential to downshift the economy into a standstill for the rest of 2013. The University of Missouri’s Food and Agricultural Policy Research Institute calls the Mississippi "the most critical artery" of America’s inland waterway system. The river transports more than 90% of corn and soybean exports to the Gulf of Mexico. Many energy utilities also rely on river barge shipments of coal and oil. Commercial traffic along America's busiest waterway is in danger of grinding to a halt.
The U.S Army Corps of Engineers has been dredging parts of the Mississippi for over six months to give barges the depth of nine feet needed by most commercial vessels. According to the American Waterways Operators, supply chain disruptions for January alone could affect more than 8,000 jobs, more than $54 million in wages, and the transportation of 7.2 million tons of commodities valued at $3 billion. This bears watching as it may have a ripple effect on food prices and the transportation sector, Chow said.
A Pretty Lousy Two Quarters
All this uncertainty is casting a cloud on the economy. For December, the National Federation of Independent Business (NFIB) monthly index of business sentiment registered at 88, a level that, prior to the financial crisis, hasn’t been seen since the 1980 recession. William Dunkelberg, NFIB’s chief economist, said the group’s members anticipate a “pretty lousy first half of 2013.” The Thomson Reuters/University of Michigan preliminary index of consumer sentiment for January unexpectedly dropped to the lowest point since December 2011 as U.S. consumers started the year feeling more worried about the economy.
Marketing Decisions Will Be Subdued
Spending decisions on booth space and design tend to lag the economy by three to six months, so trade shows scheduled for the first two quarters will mostly like grow in the low single digits. Attendance growth in the first half of the year will likely be subdued because fiscal austerity is a reality, and trade show travel is easiest to deny or cut with minor out-of-pocket repercussions. The degree of austerity is still yet to be determined, but the trend of governing by crisis doesn’t bode well for long-term economic vitality. So, expect some attendance challenges, except for shows in the hot sectors such as energy and housing. International participation, boosted by favorable exchange rates for foreign currencies against the U.S. dollar, could save the day. Meanwhile, there are enough signs of life in the economy to avoid a recession. We must continue to lobby our politicians to focus on growing jobs.
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