Perhaps you've heard the story told about ancient map makers who would mark unknown territories and uncharted waters with the frightening label "here be dragons." While it makes for a great tale, there's little truth behind it. And so it is with the economy in 2013. Gloomy headlines warn of danger ahead and disaster around every corner, but a close investigation of the data presents American business owners with a much more realistic picture that includes both challenges and opportunities.
Europe remains a hot topic of conversation and a point of concern in many conversations with business leaders. So far Europe is successfully battling its fiscal challenges while maintaining its political union. There is good news on several fronts. A new supervisory banking authority will come into being on Jan. 1. The goal will be to stabilize the banking system through direct recapitalization of troubled banks and tighter uniform regulations on more than 6,000 banks.
In addition, the major leading indicator for the region has begun to pick up, suggesting mild growth in 2013. However, there are challenges. Patience is wearing thin in Greece, and Spain has managed to hold its financial system together only on a short-term basis. Larger systemic changes still are needed in order to solidify the eurozone's fiscal stability.
China will be a major player in the 2013 economy. The recently announced $150 billion stimulus package is expected to help growth in the Chinese economy through much of 2013. Leaders hope that increased spending on roads, subways and urban rail systems can offset the noticeable slowdown in overall economic activity.
Renewed Chinese demand could help boost demand for raw materials and raise commodity prices globally. The increased activity also could provide a needed benefit to Europe, as favorable conditions in China could bolster the demand for European goods such as machinery.
In the United States, businesses have responded to the election rhetoric by holding back on major cash purchases of capital goods. The election results, however, should help remove some uncertainty about the direction of government policy in 2013. Congress and the White House have stated that they will compromise and work on solutions to pressing problems. Any solution will work to reduce uncertainty, even if no one is really happy with the deal.
While new orders for capital goods have weakened noticeably, don't expect the economy to slip into recession because of it. There have been historical cases in which nondefense capital-goods new orders dipped into recession while U.S. industrial production remained in positive growth territory. Producers are busy completing unfilled orders while waiting for business owners to renew capital expenditures.
Fiscal-Cliff Agreement Would Boost Economy
The fiscal cliff is a major concern for many Americans. Doing nothing to address these concerns is a losing proposition and is only likely to happen if partisan politics creates an unbreakable gridlock. The result would be an immense tax hike that negatively affects consumer spending in 2013, and contributes to a recession in 2014. Flow-through businesses also would be negatively impacted, hurting job creation and economic growth.
However, based on past experience, my expectation is that Congress will reach some sort of agreement on the fiscal cliff late this year or in early 2013 -- removing an avowed cause of uncertainty and thereby providing a boost to economic activity in 2013. Higher taxes on the middle class will occur even without the pain of the fiscal cliff, and this alone will lead to a reduction in consumer activity in the latter half of 2013.
Adding to my positive outlook is the fact that virtually all of our leading indicators are pointing toward more economic expansion over the next two quarters. We can see rising trends in the ITR Leading Indicator, U.S. Leading Indicator, Purchasing Managers Index, Housing Starts and Employment.
These signals indicate that now is the time to take advantage of pessimism and low prices. Spend some money to upgrade operations in an effort to maximize efficiency. Don't be driven by the "there be dragons" headlines; instead chart a course that meets the challenges of 2013 and takes advantage of the opportunities that will be offered.
Contributing Editor Alan Beaulieu is an economist and president of ITR. He is co-author, with his brother Brian, of "Make Your Move," a book on spotting business-cycle trends.