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'Fiscal cliff' resolution surpasses expectations, brings little clarity

The 'fiscal cliff' resolution met expectations, and perhaps exceeded expectations, according to Mark Vitner, managing director and senior economist at Wells Fargo Securities LLC.

“It’s less of a drag on the economy than we thought,” Vitner said at an event hosted by Wells Fargo in Del Mar on Thursday.

The effects of the so-called fiscal cliff were felt before the resolution was met, with businesses pulling back on hiring and choosing not to expand – and those effects will probably continue into 2013, Vitner said.

The projected gross domestic product for 2013 is “modest growth” of about 1.5 percent, which is lower than 2.2 percent in 2012 and the average of 2.2 percent since the recession, Vitner said. The GDP accounts for the last two quarters of the previous year and the first two quarters of the current year, he said – which will be the “weakest” parts of 2012 and 2013. He expects the second half of 2013 to be stronger than the first half.

“That already occurred. I don’t think it’s going to feel that weak,” Vitner said. He said there’s a good chance that growth will be stronger than expected. And people are going to start to tune out the different issues and think, "'It's another crisis, we're going to go to the wire and then figure it out.' I think we'll get through the next couple rounds without a whole lot of pain," he said.

Vitner said the fiscal cliff resolution only brought a little clarity on some of the tax questions, but noted that President Barack Obama has said the country is going to have to look for more ways to raise revenues, and there was no clarity given on spending reductions. Vitner said he expects to see tax increases or some sort of spending reduction later in the year.

“In my view, the fiscal situation is only going to get worse. I would want to grow and be profitable in 2013 because tax liability is going to get worse,” Vitner said, referring to business owners considering the future of their companies. “Defer income – I wouldn’t defer too much. I say, 'When you get to where you're going to go, you'll say 'I should have taken as much income as I could when I had lower effective tax rates.'"

The weakest areas for GDP growth are tied to the federal government, he said.

“I don’t know how San Diego will fare on that,” Vitner said. Cuts could be in defense, medical and health care industries.

“In defense, I can’t imagine it shrinking in San Diego. I think it’ll shrink somewhere else,” Vitner said.

San Diego’s economic drivers for 2013 will include construction, technology, life sciences, travel and leisure, and financial services, Vitner said.

“I think that construction activity, because it has been so depressed, is going to show the greatest relative improvement,” Vitner said. He expects residential building activity to pick up slightly, as well as some growth in retail and industrial, and there’s "room for some office building."

The biggest impact from the fiscal cliff resolution is in Social Security, which Vitner said never had a chance for an extension.

“Everyone who works is going to see a smaller paycheck,” Vitner said. Growth in consumer spending from the lower end may be affected by this change, he said.

The increase in taxes to those earning $450,000 and above was “better than expected,” Vitner said. It was expected to affect those earning $250,000 and above, but it is “still not the greatest of outcomes,” he said.

With the biggest driver for the economy being the growth in consumer spending, Vitner said, “The extension of unemployment benefits is the stupidest thing I’ve ever heard,” adding that it is not a form of stimulus.

“The unemployment rate is coming down because people are leaving the work force,” Vitner said. But those workers aren’t the retiring baby boomers. The unemployed demographic that is shrinking comes from the younger people not entering the work force and instead staying at home with their parents, he said.

“The only part of the labor force that is growing is those 55 and above because they lost money,” Vitner said. “Young folks aren’t coming into the workplace – even though there’s lots of them.”

San Diego experienced about 2 percent job growth last year and is now at 8.6 percent unemployment.

“I think San Diego has the right mix. My worry is with large hospitals that might struggle,” Vitner said. “The federal government didn’t deal with sequester … I wouldn’t be surprised if the somewhat optimistic take on the fiscal cliff gets watered down when it comes down to the wire on the debt ceiling, when it comes down to the wire on sequestration.”

California’s unemployment rate dipped below the double-digits to 9.8 percent. Partly responsible for the drop in the unemployment rate could be the difficulty people face when trying to come back into the work force, Vitner said.

California is driven by the technology sector, which is strong in San Jose and San Francisco, he said.

“The recovery has broadened beyond technology,” Vitner said. “Housing has improved quite a bit. There are still troubled properties out there and the best properties have been picked over. Foreclosures are down enough that there’s opportunity in residential construction and residential development.”

Vitner said he expects interest rates to increase sooner than expected.

“The consensus is that the rates will remain unchanged and hold them until 2013 and 2014. My gut tells me that that may not come to pass,” Vitner said. “The Fed may not raise rates until late 2014 and 2015, but the bond market will anticipate that a year before.”

The federal government will want to keep interest rates low going into the spring home-buying season, Vitner said. Policy to try to generate housing to “get the economy going” has been in place since World War II, which is a “short-sighted policy,” he said.

“The United States economy is consumer oriented or consumption driven and there’s nothing wrong with consuming, it’s fun – we should enjoy the fruits of our labor. But a sustainable economy recovery needs to be built on investment,” Vitner said. “Consumption is sort of like macaroni and cheese and potato chips – but investment is like the vegetables, it gives us energy. I think that if Ben Bernanke were here he’d say, 'You know Mark you’re absolutely right, but the Fed can’t do that. We can’t say we’re only going to make money available to people who are going to invest it. We control interest rates, the level of interest rates.’”

Housing has been an engine for economic growth, said Vitner, by feeding the economy in many ways – people buy a house, then buy things to put in the house.

“That’s been the driver that they’ve gone to to get the economy going, but right now it’s hard to get going because so many people are upside down – they owe more on their home than it’s worth,” Vitner said.

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