Sitting and reading through investor calls and business forecasts for 2013, certain trends are emerging. What are those trends? Before we outline those, let’s take a quick look at Q4 of 2012.
Information released yesterday and today shows what might seem to be contradictory data related to this period. First, the overall economy shrank 0.01%. There were a couple causes leading to this which indicate we may not see a repeat in Q1 of 2013, but we’ll discuss this in a second. What seems contradictory is the fact that personal income rose 7.9%, the highest jump in many years.
How can personal income go up so dramatically while, at the same time, GDP is shrinking? It was triggered of course by the rise in taxes. What do people do when they know taxes are going up? They finish business deals, sell investments, and move money out of the country in order to avoid those taxes. Even Al Gore got in on the early cash-out craze in the sale of Current TV to al Jazeera late last year. By closing this sale in December, Gore likely saved millions.
So business deals were closed, investments cashed out, bonuses paid, and numerous other business activities rushed, all to avoid tax hikes. All this activity created a one-time surge in personal income that masked the real problem, which was that, in 2012, personal income rose a dismal 0.04%.
We know then that higher taxes actually caused a surge of business activity in the last part of 2012 helping the economy and federal revenues to some extent. Now that we have higher taxes in place, what does it mean for the coming year?
First there is the looming change related to ObamaCare. This starts in October, but already were seeing changes in the way companies are hiring. As early as 2016, the IRS expects the lowest cost health plan to cost at least $20,000 per year. Smaller businesses cannot afford that, so already many businesses are paring down their workforces or hiring more in part-time roles rather than full-time. This trend will continue so the unemployment rate will remain at historically high levels throughout 2013. Already the unemployment rate is back up to 7.9%, and rates of those who are underemployed are growing as well.
With an administration that is overtly unfriendly to business, and government policies that are driving up the cost of doing business in the US, many companies this year will not invest heavily in new jobs or expansion but will instead focus on reducing overall debt levels and maintaining profitability through workforce cuts and process improvements. This may be a trend which last throughout President Obama’s second term.
In regards to the deficit, we may see an improvement if Republicans can stand firm on debt reduction over the next couple of months, but there is no guarantee of it. It’s more likely that budget deficits will remain historically high and that the national debt will continue to skyrocket.
The one thing we can know for sure now that President Obama has been sworn in for his second term is this; this time he inherited his own mess. Whether he likes it or not, he now owns it.