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Analysis/Comment Last Updated: Apr 25, 2013 - 5:20 PM

Dr Peter Morici: Deceptively strong US GDP report expected
By Professor Peter Morici
Apr 25, 2013 - 8:55 AM

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President Barack Obama talks with Evan Jackson, 10, Alec Jackson, 8, and Caleb Robinson, 8, from McDonough, Ga., while looking at exhibits at the White House Science Fair in the State Dining Room, April 22, 2013. The sports-loving grade-schoolers created a new product concept to keep athletes cool and helps players maintain safe body temperatures on the field.

Dr Peter Morici: Deceptively strong US GDP report expected - - On Friday, forecasters expect the Commerce Department to report the economy grew a brisk 3.1% in the first quarter but don't break out the champagne. Like a corporation with a spruced up profits statement at a critical shareholder meeting, several one-time factors contributed to this seemingly robust performance-the economy is already slowing and new crises are threatening.

In the fourth quarter, defense purchases and inventory investments were uncharacteristically weak and those rebounded in the New Year. Also, extraordinary year-end corporate bonuses and dividend payments, intended to soften the blow of higher 2013 taxes, pushed up consumer spending in January and February.

Those factors will not repeat in the second quarter, and January tax increases are finally starting to bite-consumers appear to have hunkered down, and confidence in the economic outlook is waning.

Higher payroll taxes and income taxes paid by the wealthy took away $165bn in purchasing power. Working- and middle-class families adjust spending to accommodate higher taxes, but with a lag, because they need to keep driving to work and feeding their children-now car dealers and shopping malls report slowing sales.

For upper income families, changes in the tax code were extraordinarily complex, and many pay taxes on a quarterly basis on self employment and investment income. The full impact of higher taxes on their after-tax income was not reckoned until their accountants computed their first 2013 tax payment due April 15-now they will be trimming purchases too.

Along with sequestration, higher taxes will subtract more than $200bn from household purchasing power and government spending-that will slow demand for what Americans make and GDP growth, and make jobs tougher to find.

A key element of the tax changes-reduced mortgage interest deduction-will dampen existing home sales. Aided by the Federal Reserve's easy money policies and a surge of wealthy buyers from Europe's troubled economies, speculative investors have been scarfing up properties in choice markets in Florida, New York City and elsewhere with cash offers that frequently squeeze out ordinary homebuyers seeking a permanent primary residence.

In several markets, prices have zoomed past what these ordinary buyer's incomes will support; hence, speculators bets require that somehow after-tax household incomes will somehow surge permitting them to unload at a profit. That is a dubious assumption, and the speculative surge cannot end well-housing price increases will slow, plateau or could crash all together. The housing market bump to household wealth that supported consumer spending in recent months will relent.

Similarly, the Fed's low-interest policies are boosting stock and agricultural land values-at a pace beyond what future profitability of either asset class should sustain. Either slower growing values or outright adjustments appear inevitable, and the resulting drag on consumer spending will slow the recovery.

The continuing surge of Chinese exports onto American store shelves, and weakening demand for U.S. products in recession torn Europe are dampening demand for U.S. manufactures. Japan's weak yen policy is imposing tougher competition on U.S. automakers and other manufacturers of technology-intensive products. Already, the Commerce department reported durable goods orders fell 5.7% in March, indicating much slower sales going forward.

The bottom line: most forecasters expect growth to slow to less than 2% in the second quarter and to remain below 3% through the end of 2014.

Peter Morici,

Professor, Robert H. Smith School of Business, University of Maryland,

College Park, MD 20742-1815,

703 549 4338 Phone

703 618 4338 Cell Phone




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