Uncertainty is the one sure forecast for the economy in 2013. Major federal decisions continue to loom large, leaving investors and businesses to watch and wait while Washington negotiates federal spending, tax cuts and new health-care regulations.
“Until we see some certainty within government decision making, not just in the short-term sense but in the longer-term perspective of what the government intends to do, in the financial sector and other sectors there is going to be hesitancy to commit to a long-term position,” says Jim Newton, chief economic advisor for Commerce National Bank.
The coming year could bring anything from recession to modest economic growth, says Newton. “The stock market has already factored in some components of the fiscal cliff, that there will be some reductions in government spending. Already they’ve factored in that the payroll tax will not be extended.”
Newton says different industries have different concerns. Financial professionals fear increased regulation and trouble keeping profits up in a low-interest rate environment. U.S. manufacturers may find exports negatively affected by the ongoing European debt crisis and economic slowdowns in India and China. The health-care industry may “take it on the chin,” he says, unless Congress decides on a permanent solution to Medicare physician payment plans. Taxpayers will likely see their paychecks reduced by 2 percent when the payroll tax holiday expires.
“In the best-case scenario, we probably start off the year with relatively modest growth,” says Newton. Once the fiscal cliff is resolved, Newton predicts modest acceleration between 2 percent and 2.5 percent.
The worst-case scenario? “The Congressional Budget Office has already forecast that if all the components of the fiscal cliff fall into place, we could see a drop of GDP,” says Newton. “Chances are, millions of jobs will be lost. Pretty darn depressing.”
One strong indicator of the health of the overall economy is the strength of the middle market. Middle-market companies (those with $10 million to $1 billion in revenue) account for nearly one-third of non-government GDP and contribute about one-third of private sector jobs, says Anil Makhija, academic director of the National Center for the Middle Market, based at Ohio State University’s Fisher College of Business.
“Given their large part in the economy, the expectations are that this segment is contributing to growth, but it is cooling down. That projects for the [overall] economy,” says Makhija.
Instead of increasing capital expenditures, these companies are “sitting on the fence” until Congress acts. Makhija predicts that in 2013, middle-market companies will be hurt by increased health-care costs, decreased federal spending and decreased consumer spending resulting from tax increases.
“I would say a tepid economy would be the implication. Of course, how all these things and the fiscal cliff are resolved can change the outlook quite a bit,” he says.
Reprinted from the January 2013 issue of Columbus C.E.O. Copyright © Columbus C.E.O.