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Watching the Economy by Clint Burdett CMC® FIMC

December 2012

Opportunity in 2013 and 2014
Local and State Governments Will Start Buying

The Congressional Budget Office (CBO) released its report on why the recovery is sluggish. From that analysis we can predict opportunities starting in 2013 and more in 2014, selling to local and state governments as their hiring patterns return to historical trends.

CBO found 2 of the 3 causes of the sluggish recovery have been from demographic macro trends since the late 1960s: reduced growth in potential employment and productivity . (Think the baby boomers retiring and we have pushed the upper limit on productivity per person.)

Potential output [potential GDP] is determined primarily by three factors: potential employment, potential total factor productivity, and the productive services available from the capital stock in the economy.

In CBO’s assessment, the growth of potential GDP has been trending downward [since the late 1960s] (Figure 2). That slowdown initially reflected a reduction in the growth of total factor productivity and then, beginning in the mid-1970s, a reduction in the growth of potential employment [emphasis added].

CBO on Potential GDP
(Click chart for larger image)

CBO explains that the 3rd cause has been lack of demand.

... To identify the causes of that shortfall in demand, CBO analyzed the contribution of each main component of demand. Compared with past recoveries, this recovery has seen especially slow growth in four of those components:

 - Purchases of goods and services by state and local governments,

 - Purchases of goods and services by the federal government,

 - Residential investment (consisting primarily of the construction of new homes, home improvements, and brokers’ commissions), and

 - Consumer spending. Among those four components, purchases by state and local governments account for the largest portion of the unusual weakness.

Recent news is encouraging that local, state and federal government revenues are recovering, huge lay-offs are over.

Like small business, local and state governments are creators of jobs and demand hence an opportunity in 2013 and 2014. I expect the hiring trends to begin to return towards the historical pattern for an average cycle in the Figure 4 below and with that, their purchases pick up.

CBO on State and Local Employment trend
(Click chart for larger image)

Finally, in other articles I and others have pointed out that residential investment is picking up after bottoming early summer, although from a deep fall. Consumers are confident enough to use savings to increase their purchases.

Given no shock to our economy, and that is a big given with the politicians pressed to work through the fiscal cliff, the recovery should pick up steam.

But, huge cuts in government spending will retard the recovery. We'll know early in 2013.

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