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Yesterday we wrote about the significance of the Durable Goods Orders number, and how the fact that businesses were re-accelerating their purchases of investment equipment was a strong sign that pre-Cliff uncertainty paralysis is not actually affecting the economy. It’s a huge deal that this major fear is not playing out as people might have thought.In a new note, Goldman’s top economist Jan Hatzius takes a look at the past week, and explains the real big picture: The proper way to think about 2013 is to see this past week as a microcosm: Strong private sector, shaky developments from Washington.
The key challenge for economic forecasters in 2013 is to weigh the relative importance of the positive impulse from the improvement in the private sector versus the increasing drag from the dysfunction and fiscal retrenchment in the public sector. Never has this been clearer than in the past week.
The news remains good on the private sector. Following upside surprises on durable goods, personal spending and income, industrial production, and nonfarm payrolls, our Q4 GDP tracking estimate has recovered most of its post-Sandy dip and now stands at 1.8%. Likewise, our Current Activity Indicator (CAI) for November has risen to 2.3%, and our US-MAP surprise index now shows the most positive reading in nearly a year on a 3-month average basis.
Following Speaker Boehner’s failure to corral enough Republican votes for his “Plan B” on Thursday, the risk of greater fiscal restraint and greater policy uncertainty has increased. This could involve a temporary move “over the cliff” or a stop-gap measure that extends lower- and middle-income tax cuts and potentially unemployment benefits, but fails to defuse both the automatic federal spending cuts and the debt ceiling.
It is perhaps an open question whether the Plan B vote fail really represents a major indicator that the Fiscal Cliff will be hit, although the market certainly did not like the implications, as evidenced by Friday’s trading.
Big picture though, Hatzius is dead on. The private sector is really to turn into high gear. Washington might screw it up. That’s the question for 2013.