Suddenly, the new year is looking a bit brighter — at least in the eyes of most economists and investors.
"There's a lot of relief," said Mark Hopkins, senior economist with Moody's Analytics. "The worst-case scenario has been averted."
Yes, there will be new budget battles in February, after President Obama has had his second inauguration and the 113th Congress has gotten itself organized.
But for now at least, Americans can take some comfort in having more policy certainty about taxes. And that helps businesses with their planning for the new year, according to John Canally, an economist for LPL Financial, an investment-adviser consulting firm.
"People now know for certain what their tax rates will be," Canally said. "Financial markets don't like uncertainty. So today's rally is about people thinking: 'OK, now I know the landscape.' "
Like most other economists, both Hopkins and Canally say growth will continue in 2013, but not by a robust pace. That's because part of the legislation passed Tuesday by Congress will end the payroll tax holiday, which had been in place for two years. That will reduce take-home pay for all workers.
"The payroll tax comes back now and that will affect everyone right away," Canally said. "It will be a drag on the economy" because the typical household will have roughly $1,000 less to spend this year, compared with 2011 and 2012.
On the other hand, the rebuilding efforts in parts of the country hit by Hurricane Sandy this past autumn will generate jobs and spending, he noted. On balance, the economy should grow at about 2 percent in 2013, which would be roughly the same pace as 2012, he said.
That forecast is in line with other mainstream economists. The consensus is that growth will be well below the 3 to 4 percent expansion rate that would generate strong job growth and better incomes. But it should be enough to continue to whittle down the 7.7 percent jobless rate and keep the recovery growing into its fourth year.
Tom Porcelli, chief U.S. economist for RBC Capital Markets, predicts the housing market will continue its slow recovery in 2013. After a brutal slide since 2006, "housing has bottomed," he said. At this point, its turnaround is "well embedded" and unlikely to falter, he said.
"We do expect housing to continue to improve, albeit glacially," he said.
Industrial production will expand too, but at a rather disappointing rate of 2 percent, according to the Manufacturers Alliance for Productivity and Innovation, a trade group. "It will not be until the second half of 2014 that the economy will grow at what could be called a moderate pace," the group's chief economist, Daniel Meckstroth, said in his forecast.
But there are some brighter spots within manufacturing. Auto production, for example, should remain fairly healthy because Americans are buying more cars than they have in four years. Edmunds.com, which closely follows the auto industry, forecasts light vehicle sales will rise 4 percent over the pace set in 2012.
And aircraft makers are somewhat upbeat, mostly because of growth in overseas markets. Marion Blakey, head of the Aerospace Industries Association, said her trade group's number crunchers are predicting $6 billion in additional sales in the coming year.
"There's good news for 2013 — yes, that may surprise you," Blakey said at the AIA's annual forecasting luncheon in December. AIA says customers all over the world are upgrading fleets with more fuel-efficient aircraft, giving a boost to U.S. manufacturers.
Exports are the key to expansion in the agriculture sector too. The U.S. Department of Agriculture says that over the period from 2009 to 2012, farmers had the best four years ever for exports, which shot up more than 50 percent.
Brandon Kliethermes, the agriculture economist for IHS Global Insight, said most U.S. farmers and ranchers had a tough year because of drought. Still, with the help of federal insurance and high global prices, many were able to profit in 2012.
"They had a terrible production year, but from a financial standpoint, they came out fine," he said. That means they now have money to spend on preparing for spring. "They are upgrading equipment, buying new tractors and trucks," he said. "We keep having these droughts, but at some point, we'll have average weather."
If 2013 turns out to be that "normal" weather year and exports continue to be strong, "the potential for locking in profits is there," Kliethermes said.
CELESTE HEADLEE, HOST:
This is TELL ME MORE from NPR News. I'm Celeste Headlee sitting in for Michel Martin, who is under the weather. Coming up, we're exploring the decision made by an increasing number of young women to save themselves for marriage.
But first, a look at the news that everyone is talking about - the deal reached by Congress that'll keep us from going over the so-called, dare I say it, fiscal cliff. The deal tackled some issues like income taxes, but it left some big spending questions unresolved. Here to explain more, NPR senior business editor Marilyn Geewax. And also joining us, Joe Davidson. He writes the Federal Diary column for the Washington Post, focusing on federal workers.
They're both here with me in the Washington studios. Marilyn, Joe, thanks for being with us.
JOE DAVIDSON: Thank you.
MARILYN GEEWAX, BYLINE: Hi. Great to be here.
HEADLEE: Marilyn, maybe you could just kind of lay out really plainly the good and the bad of this deal. Who wins, who loses?
GEEWAX: Well, from an economist's standpoint probably the single best thing about it is that it avoided extreme risks. There was a real risk that if everybody's taxes went up dramatically starting in this new year, it would really put the brakes on the economy. They needed to avoid that.
So this package means that - actually, it's more like 99 percent of people won't see any income tax increases. So what didn't happen is important. But there's also some good things in terms of the economy. There's certainty now about some things, like, for example, more than two million people got federal extended unemployment benefits.
If they had not passed this package, more than two million people who go shopping, who buy things, who pay rent, would've been maybe unable to do that in the worst part of the winter. So that would've been pretty tough for a lot of families and for the retailers who sell them gas and milk and those kinds of things.
And speaking of milk...
GEEWAX: Part of the deal - now, how strange is this? This is supposed to be a fiscal cliff deal, but milk got into the mix because Congress also hasn't addressed some farm support programs. And one of the things they had to do was tack on an extra little thing in here that made sure that milk prices wouldn't zoom up.
If we had not gotten this deal, really, the price of milk could've gone to potentially seven, eight dollars a gallon. And then this business of - there's this terrible word - sequestration - that refers to big broad spending cuts, and that got delayed for at least two months. Now, that's - two months is not great.
HEADLEE: That's also a negative though.
GEEWAX: Well, but you know, if you're one of the people who was looking at January saying, I wonder if I'll be able to keep the heat on in my home, you now know that at least for January and February you probably won't be laid off. So those are pretty good things. A little more certainty. And certainly for the people who depend on things like the unemployment checks and their milk for their kids, this was a pretty good decision.
HEADLEE: Right. But it wasn't all good. I mean obviously there's a lot of hand-wringing this morning. And so clearly - I mean we already spoke about sequestration. That means we have to be back here debating these very same things in a matter of weeks. That's one negative. What other things are not so great about this deal?
GEEWAX: Well, this is something that as soon as you get your first paycheck in January, you will notice every single worker is going to see a tax hike. Now, you heard me just say that 99 percent of people avoided that. So what are we talking about? There are two kinds of taxes. There's the income tax that is used to fund the federal government, but there is also what they call a payroll tax, and that goes to help make sure that Social Security is there for every worker.
We all pay into this system. We can all take money out of the system. But two years ago, in an effort to get more cash into people's pockets because the economy was so weak, Congress agreed to a payroll tax holiday. This was not a tax cut; it was a vacation from the tax. That vacation...
HEADLEE: That vacation is over.
GEEWAX: ...ends. As those of us who are back to work today know...
GEEWAX: ...vacations, holidays, do end.
GEEWAX: And it's painful to come back to work and it doesn't feel great at first. But you know, you need to work and actually we need to pay those payroll taxes.
HEADLEE: That's right.
GEEWAX: So we have ended that holiday and this is going to be a bite for people.
HEADLEE: All right. Joe, let me bring you in here, because I want to go back to some of the things we haven't finished. I mean a lot of this, yet again, has kicked the can down the road, which is bad for your topic, federal workers.
DAVIDSON: Well, the issue of certainty and uncertainty really comes into play here, because for federal workers, federal agencies, and really ultimately the taxpayer, uncertainty remains because of this issue of across the board spending cuts that was basically kicked down the road for two months.
And so what that means is not until early March will there be some certainty, unless, of course, Congress then kicks it down the road.
HEADLEE: Delays it again.
DAVIDSON: Which it has the power to do. I don't think that's going to happen. But for federal workers in particular, which might be - it's difficult for them because they don't know if there are going to be furloughs. Some union leaders have speculated on the possibility of layoffs.
Clearly there are going to be budget cuts to the agencies. That can affect services to taxpayers.
HEADLEE: Federal agencies.
DAVIDSON: Yeah, to federal agencies. So that can affect the taxpayer. And you know, I remind people too that when we're talking about federal workers, we're not just talking about, you know, this enclave here in the District of Columbia. Eighty-five percent of the federal workforce is outside of the district. And there are retirees. There are two million federal workers in total.
With retirees and family members we're talking about maybe eight or nine million people who could be affected in one way or another by anything that hits the federal worker. And so this uncertainty is something that still has the federal workforce - and I think certainly to some degree the public in general - still a bit worried because you just don't know what's going to happen two months down.
HEADLEE: Yeah. And you can't really blame them, can you?
DAVIDSON: That's right.
HEADLEE: If you're just joining us you're listening to TELL ME MORE from NPR News. I'm Celeste Headlee sitting in for Michel Martin. I'm here with NPR senior business editor Marilyn Geewax and Washington Post columnist Joe Davidson. They're talking about the agreement that was reached over the so-called fiscal cliff to avoid it.
Let's take a listen here to one of the people involved. This is Virginia Democratic Congressman Jim Moran and he's talking about exactly what both of you are talking about.
REPRESENTATIVE JIM MORAN: It sets up three more fiscal cliffs over the next three months - when appropriations spending expires on March 27, when the debt ceiling has to be increased at the end of February, and when the sequester has to be dealt with at the very same time.
HEADLEE: So Marilyn, what is your take on this. I mean in the end, did we actually solve the uncertainty that so many business people and Wall Street have been talking about?
GEEWAX: No. We really haven't solved the big problems at all. This brought some certainty with tax rates, and that's a positive there. It brought some certainty, as I said, for some categories of people, the unemployment checks and that sort of thing. But the big, big question before us is how are we going to fund government going forward?
We have about 78 million baby boomers who every day get older. I've noticed that myself. As the generation gets closer, people in their 40s, 50, early 60s, are moving closer to retirement and something has to be done to make sure that those programs, Medicare and Social Security, are stable. And we really have not addressed any of that.
And in fact, the Congressional Budget Office, which scores these things -determines how much does a deal cost and what will it do to the deficit - it says that over, you know, the next 10 years, if things don't change, the debt will only grow by another $4 trillion. So that's a really big issue.
HEADLEE: Yeah. Absolutely.
GEEWAX: And 10 years from now, how many baby boomers will be retired? Lots and lots and lots.
HEADLEE: Well, Joe, let me bring this to you. Because a lot of people are saying, well, they delayed it because we're getting a new Congress and it'll be easier to reach a deal in 2013. Do you buy that?
DAVIDSON: Well, no, not necessarily. I mean the Congress has changed somewhat but I don't know that it's really changed significantly. I think that just the difficulty that we saw reaching this deal, you know, at the last second - actually, beyond the last second - shows that it's going to continue to be difficult.
Because the complexion of the Congress isn't going to really change significantly. So I think we're going to be revisiting these same issues between now and throughout the remainder of the winter and into the spring.
GEEWAX: Wait. Now, I want to wear the crown as Pollyanna. I want to go positive here for a moment. Here's something that is different. I totally agree with you that the basic makeup of Congress hasn't changed, but one thing that is different is President Obama is in his second term now and he really does want to leave a legacy as a great president. I think it's a goal of his to not just sort of limp out of office but to at the end of that eight year term set the country in a better direction, at least by his lights.
And I think he would be very motivated, really, to get something done now, and this battle has been so bruising. This fiscal cliff fight is so fresh in everyone's minds that maybe - OK, call me crazy, but it may be that they found some mechanisms within here to learn how to move forward. Joe Biden, I'm looking at you. It turns out that Vice President Biden was helpful in working with the Senate. I think the president has a secret weapon sitting on the side there, which is the Defense Department secretary, Leon Panetta. He has a long history in the House.
HEADLEE: And you mention him because these sequestration cuts would affect defense.
GEEWAX: Really affect defense, and he's the guy that does not want to leave office seeing the defense budget in tatters.
GEEWAX: So you know, he's a guy that's spent years and years and years in the House working on budget issues. If he could get Panetta to work with the House - and he's respected there because of his experience in the House and his Pentagon status...
HEADLEE: And a plain speaker. Yeah.
GEEWAX: ...and you put together a Biden to handle things with McConnell, and Obama wants to move forward - call me crazy, but maybe there's somewhere in all of this rubble some reason to believe that they have found a way to put deals together.
HEADLEE: What do you think, Joe?
DAVIDSON: I say I hope you're right, but all of the things you've mentioned have been in play now for some time. It's not as if Panetta just entered the Pentagon. It's not as if Joe Biden just became vice president. These players have been there for a while, so I'll simply say I hope you're correct, but show me.
HEADLEE: Show me the money. OK. Can I characterize your two attitudes? It sounds like Marilyn is cautiously optimistic?
GEEWAX: Yes. And there's other reasons for some cautious optimism. You know, the economy has been battered for five years. We actually technically went into a recession in December of '07, so we had just finished...
GEEWAX: ...five years of a lousy economy. Some of it was in deep recession. Some of it was in a sluggish recovery, but you know, after a while, actually, people's cars wear out. They need new ones and they're...
HEADLEE: OK. So you're saying...
GEEWAX: ...buying them.
HEADLEE: ...you're optimistic because we solved a bit of the portion and the economy's looking better.
HEADLEE: But Joe...
HEADLEE: ...I'm not going to add optimistic anywhere to my description of you.
DAVIDSON: Just cautious. I mean I think it's like a soap opera up there on Capitol Hill and not a very good one, and I think they've been clashing for so long, it seems like that's the norm. I certainly hope that they have, in a sense, learned their lesson, but I have to - I'll have to see it to believe it.
HEADLEE: Congress isn't so great at learning their own lessons. But anyway, that was NPR senior business editor Marilyn Geewax, and also with us, you just heard Joe Davidson. He writes the column The Federal Diary for the Washington Post.
Marilyn, Joe, Happy New Year.
DAVIDSON: Happy New Year.
GEEWAX: Thank you. Happy New Year to you, too.
HEADLEE: Thanks for being with us.
DAVIDSON: Thank you. Transcript provided by NPR, Copyright NPR.