The following is a report issued today on the economy by Curtis-Rosenthal, Inc., a well-respected real estate appraisal and consulting firm in Los Angeles.

STORM CLOUDS BREWING

This week our friends at Wells Fargo Securities (WFS) caution that storm clouds are brewing on the economic horizon.  After some tough economic data reports, the Fed downgraded their economic outlook.  We also have to watch out for the “fiscal cliff” that looms ahead of us in 2012.  Read on for more specifics….

Rough Economic Data

Last week was a tough week for economic news on the U.S. economy.

•  The Federal Reserve downgraded its outlook for economic growth.
• They announced that Operation Twist would be extended through the end of the year.
• WFS tells us that a number of indicators continued to show slowing growth in the months ahead.
• They project GDP growth of 1.6% for the second half of 2012 and 1.7% for 2013. 
• The Leading Economic Index released this week signaled a subpar pace of economic growth.

WFS says that while still in the range of positive growth, there are clear signs of slowing economic growth.

Fed Forecasts

The Fed’s revised forecasts for key indicators in 2012 are as follows:

• Declining Real GDP growth: 1.9% -2.4% (down from 2.4% -2.9%)
• Increasing Unemployment rate:  8.0% – 8.2% (up from 7.8% – 8.0%) 
• Declining Inflation: 1.2% – 1.7% (down from 1.9%-2.0%)

Fed Actions

The Fed downgrade of its outlook was due to:

• The recent pullback in economic indicators
• A disappointing pace of improvement in the labor market
• Heightened concerns over the Eurozone debt crisis

In addition to extending Operation Twist through the end of the year, the Fed also reiterated their forecast that interest rates will remain low through the end of 2014.

WFS contends that this brings us closer to a QE3 move if growth continues to slow and/or the European crisis deepens.

The Looming “Fiscal Cliff“

Bad News – The second half of 2012 will likely hold great uncertainty about fiscal policy given the looming “fiscal cliff” that is approaching in January 2013, when policies that have reduced the tax burden on households and businesses are set to expire.  These include:

• the “Bush Tax Cuts”
• the payroll tax cut
• a reduction in government spending due to the Budget Control Act’s sequestration clause
• the end of emergency unemployment benefits

These policy changes will weigh on GDP growth as consumer disposable income and government consumption fall.

The combined negative impact of these policy changes would amount to more than 3% of GDP in FY2013.

WFS estimates that negative growth in Q1, along with a second half recession would produce nearly flat growth for all of 2013.

Good News – However, WFS believes the full effects of the “fiscal cliff “will not come to fruition.

They instead project that the current Congress and administration will pass a continuing resolution of existing policies, which will force the new Congress and the president to determine a long-term solution.

The net effect of a short-term continuing resolution is that political uncertainty would remain elevated through the end of 2012 and the first half of 2013.

Bad News – WFS is already seeing signs that growth has softened in response to the fiscal uncertainty.

They project that this uncertainty will likely persist throughout the rest of the year, which will dampen U.S. economic growth until a longer-term resolution to the fiscal cliff is determined.

Overall, it sounds like we may not be out of the woods yet, so as always, stay focused, and stay tuned…..

David

David Rosenthal, MAI, FRICS
President & CEO

Curtis-Rosenthal, Inc.
5959 W. Century Blvd., Suite 1010
Los Angeles, CA 90045

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