|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
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
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.
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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