April 22, 2013
|Alan Levenson, T. Rowe Price Chief Economist|
After a slowdown at year-end, the U.S. economic recovery appears to be back on track. In a recent interview, Alan Levenson—chief economist for T. Rowe Price—discusses the U.S. economic outlook for the rest of the year, including what forces got us to this point and what the prospects are for stronger growth.
With unemployment recently hitting a four-year low, Levenson says it looks like the economic hiccup in late 2012 was temporary, driven by fear of federal tax increases and spending cuts and the crisis in Europe. A major factor in job growth is that the recovery in the housing market has finally begun to translate into housing-related hiring.
Housing starts and home prices also point to a broader recovery. Levenson notes that when housing starts first began to pick up, it was largely in multifamily structures because many people were looking to rent rather than buy. Now housing starts are picking up in single-family homes. Home prices have also continued to rise, helping up to 2 million mortgages get out of upside-down status. As homeowners feel more secure, consumer confidence rises and people begin to spend again.
The Federal Reserve announced that it would keep short-term interest rates very low at least until unemployment drops to 6.5%, which Levenson believes is not likely until mid-2015, and as long as the 12- to 24-month inflation outlook remains below 2.5%. However, we may see a change in the Fed's quantitative easing program through which it has been purchasing $45 billion in Treasuries every month this year and $40 billion in agency mortgage-backed securities every month since last September. The Fed hasn't provided details, but Levenson anticipates that the central bank may begin tapering off the program in the second half of the year if the recovery continues.
For the first quarter, consumer spending grew close to 3%. Levenson doubts that pace will be sustained because consumers have been dipping into savings to compensate for higher taxes and higher gas prices. However, he does believe the private sector is gaining momentum. Recent record highs in U.S. equity markets have increased both consumer wealth and confidence. Businesses are hiring and investing in their companies.
Levenson concurs with Congressional Budget Office estimates that the effects of higher taxes and budget sequestration will knock about 1.5 percentage points off what the GDP would otherwise have been in 2013. Levenson is expecting roughly 2% growth for the year as he feels it would have exceeded 3% otherwise.
Moving forward, Levenson says dysfunction in Washington will remain a factor in the U.S. economy, but it is moving from a state of constant crisis to a phase in which discussion is somewhat more civilized. That's a much needed change if Congress and the President are to resolve deep-seated issues like entitlement reform. Overall, Levenson believes that prospects are good for continued recovery and that the private economy is gaining traction, but progress will still be slow.
The views are as of April 4, 2013 and may have changed since that time. This information is provided for informational purposes only and is not intended to reflect a current or past recommendation, or investment advice of any kind. Opinions and commentary do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.