Regional economy: moderate growth in 2013 - Clarksburg, Morgantown: News, Sports, Weather

Regional economy: moderate growth in 2013

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Sluggish growth with significant headwinds — that's a top-level description of the regional economic outlook.

"It is what it is," said R. Andrew Bauer at the Morgantown Economic Outlook Conference hosted March 19 in Morgantown by the West Virginia University College of Business and Economics. "We're seeing a very moderate recovery the last couple years, and we're expecting it to continue through 2013." 

Consumer spending is likely to continue at a moderate pace, said Bauer, a regional economist with the Baltimore Branch of the Federal Reserve Bank of Richmond. Business investment likewise is expected to remain less than robust, and the slowdown in government spending also will weigh on growth in the near term.

Uncertainty remains an impediment to stronger growth, Bauer said — regarding both U.S. policy and the weak outlook for Europe.

Inflation, at least, is expected to remain moderate. And the bright spot: Recovery has set in in the housing sector, and improvements are set to continue.


Typically, following a recession, consumers will unleash pent-up demand, Bauer said. But not this time. "There's key components you would see cyclically that would help the economy that haven't happened."

One major factor is the continued resolution of the housing market imbalance.

Since the end of the recession, consumer spending has grown at a sluggish 2 percent. Job growth and wage growth have been slow, and adjustment to household balance sheets continues — due still in part to the drop in home value and the blow that has meant for household wealth. Household debt has fallen in relation to disposable personal income but remains historically high.

Looking into 2013, while household debt remains high, the household cost of debt service is lower than any time since the 1980s, which could point to increased spending ahead.

Labor market, business

The labor market remains weak. Among the indicators is the high number of people who have been unemployed long term. Average length of unemployment in the past has been less than 27 weeks, or 6 months; currently, fully 40 percent of unemployed people have been unemployed for 6 months or more. "It's a dramatic change from what we've seen in the past," Bauer said.

Why? Two primary reasons.

In construction, it's taking a long time to rebound. More than 2 million direct construction jobs were lost during the recession. Construction has started to turn around, he said, which may move some long-term unemployed back into the labor force.

Another reason is a shift resulting in a disconnect between manufacturing jobs and manufacturing workers. With the movement of manufacturing overseas during the last several business cycles, and with improved efficiencies in manufacturing technology, it's now become difficult to find skilled manufacturing workers, and open positions remain unfilled.

Bauer referred to concerns about particular and unexpected softness in the economy in 2012. Activity in manufacturing and other sectors flattened out. "The last time we saw this kind of activity in the manufacturing sector was in 2007" — just before the recession. Business investment also fell off in the third quarter. However, activity has picked up into 2013, he said, easing those concerns.

The bright spot

Back to the bright spot. The housing market is on the upswing — so much so that, in some parts of the country, there may be a coming shortage of inventory.

Three measures all show that home prices have increased over the past year, with estimates ranging from 5.8 percent to 9.7 percent.

"That is huge. Remember it's one of the components of changes in household wealth," Bauer said. "Those changes (improvements) in wealth will stabilize and support future consumer spending."

And that, he said, bodes very well for the economy in the near term.


Bauer addressed those two broad sources of uncertainty.

"One obviously is the long-term budget outlook."

The ratio of federal debt to gross domestic product rose sharply in the late 2000s and is now a little under 8 percent of GDP. Some economic research shows that "bad things happen at 9 percent"; although that research is not on the U.S. economy, it has people thinking about how much debt is too much, he said. Under current law, debt-to-GDP will drop slightly in coming years then move up again toward 2020 with rising health care costs.

A lot remains to be done to reduce federal debt, Bauer said.

"Where is additional revenue, where are additional cuts going to come from?" he asked. "These debates haven't been very conducive to stronger economic growth."

Another source of uncertainty since 2010, which Bauer said has had a "huge impact" on risk-taking and business investment, is what's going on in Europe. It's difficult to see those European economies that are in recession and have large deficits getting better any time soon, he said.

Overall, the Federal Reserve System's Federal Open Market Committee sees moderate GDP growth of 2.65 percent for 2013 and, for 2014, 3.25 percent, he said.

The FOMC's January statement projected that the economy will proceed at a moderate pace and the unemployment rate will gradually decline, with some downside risk due to global financial markets, and with inflation running at or below the Fed's 2 percent objective.