Mild but Manageable Recession in 2013?

Some combination of rising taxes and reduced government spending will take buying power out of the economy, thus resulting in a mild recession, according to the April 2012 Trends Report from ITR Economics.

Although the report’s authors predict President Obama will be reelected, they don’t believe having a Republican in the White House next year would change the effect of fiscal policy being a drag on U.S. economic growth.

With the Fed’s focus on “core inflation,” which excludes food and energy, prices in those two areas will continue to rise, thus decreasing the consumer’s discretionary income. This will likely become a macroeconomic problem, the report states.

On the industrial side, new orders for industrial machinery are projected to decline through mid-2012 before a rising trend takes hold through mid-2013. A weakening new orders trend, which typically leads production by about three months, means deteriorating production conditions over the next two quarters.

“Wholesale inventory of machinery, equipment and suppliescurrently stands at a 26-month high and rising, suggesting the weakness in new orders is due to an increasing supply of unsold machinery,” the report notes.

However, on the bright side, U.S. exports of general and industrial machineryare ascending to record levels. Annual exports through January grew 16.2% from the 2011 level and more gains are likely this year as the global economy improves, the report adds.

When will this mild recession hit? Look for the quarterly data for most measures of the economy to start to soften up beginning around mid-2013, the report suggests. Quarterly data will then trough around mid-2014 followed by annual averages and totals establishing lows around year-end.

“We are projecting this will be a mild recession because it is unlikely that consumers are going to go crazy with debt during the period of business cycle rise and because we are projecting that most businesses will remain relatively ‘right sized’ in terms of their labor force (in part because of the lack of skilled labor we are presently experiencing),” the report concludes. “If interest rates go up, they are not expected (by us) to ascend more than 300 basis points, which will be another contributing factor to the mildness of the downturn. … and mild equals manageable for businesses.”

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