Economic Review 2013 – 1st Quarter

The state of the general economy can help or hinder a business’ prospects and therefore has a direct impact on the value of a business. The economic recovery following the recession of 2007-2009 continues, but modestly. Following the March 19-20, 2013, meeting of the Federal Open Market Committee (the “Committee”) of the Federal Reserve, the Committee issued a statement that economic activity appears to have returned to moderate growth following a pause in the fourth quarter of 2012. Household spending and business fixed investment have advanced and the housing market has strengthened, although the unemployment rate remains elevated and fiscal policy has become more restrictive.

Gross Domestic Product

The U.S. Bureau of Economic Analysis (BEA) estimates that real gross domestic product (GDP) — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 0.4 percent in the fourth quarter of 2012. Quarterly GDP data for the preceding ten years is shown in the following figure.

Seasonally Adjusted Annualized Rates; Shaded Bar Indicates Recession


Sources: U.S. Bureau of Economic Analysis and National Bureau of Economic Research. GDP percent change is based on chained 2005 dollars.


The Employment situation in the Untied States remains weak. In the 25 consecutive months from February 2008 to February 2010, 8.7 million non-farm jobs (net) were lost. In the 37 consecutive months from March 2010 to March 2013, 5.9 million non-farm jobs (net) were created.1 The unemployment rate peaked at 10.0 percent in October 2009 and has abated somewhat to a still-elevated 7.6 percent as of March 2013.2 Such a high level of unemployment places severe strain on the economy as consumers are unable or reluctant to spend. The past ten years of employment data are presented in the following figure.

Shaded Bar Indicates Recession

Sources: Department of Labor, Bureau of Labor Statistics, and National Bureau of Economic Research. Data represents non-farm payrolls.

Interest Rates

The Committee meets periodically to assess economic conditions and determine appropriate policies to fulfill its dual mandate of fostering maximum employment and price stability. At its March 19-20, 2013, meeting the Committee kept the target federal funds rate at zero to 0.25 percent and anticipated that an exceptionally low federal funds rate is likely to be warranted as long as unemployment is greater than 6.5 percent and inflation expectations remain close to the Committee’s goal of 2.0 percent. The Committee also announced that it would continue its policy accommodation by purchasing mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury bonds at a pace of $45 billion per month, with no specific end date. The Committee will continue extending the average maturity of the Treasury securities it holds and reinvesting proceeds from maturing bonds. Ten years of historical interest rate data is shown in the following figure.

Shaded Bar Indicates Recession

Source: Federal Reserve Statistical Release H.15 (519) Selected Interest Rates.

Current Events

The European sovereign debt crisis that began in earnest with Greece in 2010 continues to spread at a slow pace and shows no signs of resolution as of year-end 2012. Although the proximate cause was the 2007-2009 financial crisis, a combination of persistent structural deficits, trade imbalances, and real estate bubbles in the decade prior have resulted in a series of European nations requiring substantial financial bailouts. A “troika” of international lenders consisting of the European Union, the European Central Bank, and the International Monetary Fund has provided extraordinary financial support to five of seventeen euro area countries: Greece (April 2010), Ireland (November 2010), Portugal (May 2011), Spain (June 2012), and Cyprus (June 2012). In March 2013, Cyprus’s financial system required a €10 billion bailout that involved wiping out a portion of many depositors’ accounts, leading to capital controls to prevent an exodus as depositors attempted to withdraw their money. The unprecedented levying of deposits sparked renewed fears throughout Europe about the safety of banking deposits. There is speculation some countries may exit the European Union.

In the United Staes, fiscal policy has become more restrictive following the expiration of certain temporary measures enacted in the wake of the recent recession. On January 1, 2013, the payroll tax increased 2 percentage points to its pre-2010 level, pressuring employees’ disposable income. On March 1, 2013, budget cuts contained in the Budget Control Act of 2011 came into effect. This “sequestration” will reduce federal spending by approximately $85 billion in the fiscal year ending September 30, 2013, and approximately $1 trillion from 2014-2023. Democrats and Republicans are unable to agree on the best course of action to support the economic recovery while reducing the large and recurring federal budget deficits. Policy uncertainty continues to weigh on consumer and business confidence.


In recent months, various statistical reporting agencies have revised the U.S. economy’s projected growth rate downward as the strength of the economic recovery has moderated and substantial uncertainty remains about the ability of American and European governments to enact policies that will stabilize debt levels while supporting economic growth. In March, the Federal Reserve slightly lowered its projected range of both near-term and longer-term GDP growth from its December forecast. This data is presented in the following figure.


Source: Federal Reserve.

The Congressional Budget Office’s (CBO) February 2013 report estimated that the federal budget deficit for fiscal 2013, which ends September 30, will be $845 billion, the first year since 2008 with a deficit of less than $1 trillion. The CBO projects subdued economic growth in 2013, reflecting the sharp increase in federal taxes and the reduction in federal spending that have already begun or are scheduled to occur under current law.3 The CBO estimates that real GDP will grow 1.4 percent in 2013 and 3.4 percent in 2014, with growth averaging 3.6 percent from 2015-2018. GDP is expected to remain below the economy’s potential until 2017.4

Inflation, as measured by the Core Consumer Price Index, which excludes the effects of food and oil, is forecast to be 1.5 percent in 2013, eventually increasing to an average of 2.0 percent per year in the 2019-2023 period.5 On September 11, 2012, Moody’s Investor Service warned that the United States’ credit rating was at risk of being downgraded from Aaa if budget negotiations do not result in a stabilization of the country’s ratio of debt to GDP.


1 Source: Bureau of Labor Statistics. “Employment, Hours, and Earnings from the Current Employment Statistics survey (National).”

2 Ibid. Unemployment rates reported on a seasonally adjusted basis.

3 U.S. CBO. “An Update to the Budget and Economic Outlook: Fiscal Years 2013-2023.” February 2013.

4 Ibid.

5 Ibid.