Here’s what we got right, and wrong, about the economy in 2013

December 31, 2013

A year ago, we brought you an analysis of the forces that appeared likely to shape the U.S. economy, for better and worse, in 2013. So what did we get right and what did we get wrong? And of the things we posed as open questions, what did the answers turn out to be?

Here, in the interest of pundit accountability, is a look at our 2013 economic outlook piece with the lovely benefit of hindsight.

"Will 2013 bring a genuine, no-holds-barred recovery?": This was the headline on our piece. "Will this be the year that the economy finally breaks out of its pattern of sluggish growth that has held since the recession ended in 2009?" we asked. The answer is a resounding no. On jobs, for example, the nation added an average of 183,000 jobs a month in 2012--and 189,000 a month through the first 11 months of 2013. GDP growth was 2.8 percent in 2012, and has averaged a 2.6 percent annual pace through the first three quarters of 2013. There is no disputing: In terms of overall growth rates, 2013 has been a more-of-the-same kind of year.

The housing rally: One of the biggest reasons for economic optimism at the dawn of 2013 was the sense that the U.S. housing market was finally turning a corner and entering a robust expansion. In a narrow sense, this prediction has proved true. The number of housing units started in the first 11 months of 2013 was 19 percent higher than in the same period of 2012. Home prices are up 13.6 percent in the 12 months ended in October, as measured by the S&P/Case-Shiller home price index. So, winning, right?

Well yes and no. That's a nice rally, and maybe the most one could realistically hope for in a single year. But housing remains far below its usual levels of contribution to the economy. In the third quarter, residential investment was 3.1 percent of GDP, well below the 4.7 percent average since 1947 and lower than any time on record other than during the current downturn.


Ratio of residential investment to GDP. Source: BEA.

Similarly, the rally in homebuilding activity isn't translating into construction jobs. The sector has added 274,000 positions in the 12 months ended in November, which isn't enough to meaningfully increase the proportion of U.S. jobs in the construction sector back to historic norms, as this chart shows:


Construction employment as a proportion of total employment (Source: BLS)

If the housing recovery becomes truly robust in 2014, one would hope to see progress on both those measures of its contribution to the overall economy.

Household debt. We noted a year ago that the combination of low interest rates out of the Fed and work by American consumers to pay down their overhang of mortgage, credit card, and other debt from before the crisis could mean that American consumers would be in better shape in 2013. This looks to be spot on. Progress on these fronts has remained steady, and it looks like the deleveraging process, which held back consumer spending for the last half a decade, may finally be done. In the third quarter, for example, mortgage debt outstanding actually ticked up for the first time in 21 quarters--though debt as a percentage of income continued falling, suggesting Americans aren't getting in over their heads.

State and local government. It looked at the end of 2012 like the long contraction in spending and employment among state and local governments might have run its course. "Don't look for this sector to be a major driver of hiring," we wrote last year, "but by ceasing to be a negative, it could stoke the recovery in 2013." that also looks about right. In November 2012, state and local governments employed 19.081 million Americans. A year later, that had risen to 19.151 million. It's not much of an increase -- but in contrast to 2010, 2011, and 2012, state and local government wasn't a drag on job creation.

The federal government blowing it. By the second day of 2013 it was clear that one fear we raised in our story had not come to fruition: The United States did not go over the "fiscal cliff" of dramatic tax increases. But a second concern proved more valid. "Too much austerity, too fast," was the risk we identified then, and that has indeed been the factor holding back growth in 2013.

First there was the moderate tax increases that were included in the fiscal cliff deal. Then, on March 1 the automatic spending cuts under sequestration went into effect. By JPMorgan's estimates, federal fiscal policy dragged growth down 1.8 percentage points in the 2013 fiscal year; other analysts offer similar numbers.

In other words: 2013 could have been quite a strong year of growth, but for aggressive belt-tightening by the U.S. government. We identified it as one of many risks a year ago -- but it turned out to be the risk that very much materialized.

Smooth sailing internationally. Hey, remember the euro-zone crisis? Started in Greece? Seemed on the verge of causing a new global financial crisis off and on in 2010, and 2011, and 2012? No? You're not alone.

Some of the best news for the U.S. economy in 2013 was the absence of negative shocks from Europe or elsewhere in the world. We ticked off a litany of these risks in the year-ahead piece, from a return of the euro-zone crisis to a Chinese recession to geopolitical instability in the Middle East causing an oil price spike. None materialized.

Maybe it's good luck. Maybe it's good policy. Either way, the United States economy had the luxury of a period of global stability that meant that the major threats to growth were all within U.S. borders.

In other words, we had a year of okay growth -- that could have been something quite a bit better if fiscal austerity hadn't taken a bite out of things.

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Brad Plumer · December 31, 2013