Strategist: Economy expected to ‘muddle’ through 2013

The U.S. economy is expected to grow next year at a less-than-ideal rate, but that’s not necessarily a bad thing.

That was the message delivered Friday morning by John Augustine, chief investment strategist at Cincinnati-based Fifth Third Bank, who spoke at IBJ’s annual Economic Forecast. (For a recap and discussion of how the winner of the presidential election could affect the economy, see video below.)

Entering 2012, Augustine said the growth of the U.S. economy hinged on the number three: Gasoline prices needed to stay within the $3-per-gallon level, the inflation rate needed to be at or below 3 percent (it was 1.7 percent through August), and gross domestic product needed to grow 3 percent.

GDP growth, at just 1.25 percent, continues to be among the biggest drags on the economy.

So Augustine is scaling back his expectations for next year—to just 2 percent GDP growth—as the economy continues to “muddle,” he said. But that’s OK as long as growth remains above the inflation rate, he said.

“This year, despite the recession in Europe, we’re moving forward, just not as much as we would want,” Augustine said, citing improved housing and unemployment numbers. “However, we’ve still got three months to go, and we do see storm clouds on the horizon.”

High unemployment remains a concern, along with federal spending rates and volatility in the commodity markets, particularly concerning high gasoline prices.

If the U.S. economy relapses into recession, much of the blame will fall on the federal government, Augustine said, for spending much more than it takes in. That’s what parts of Europe are experiencing now.

“We’re literally paralyzed by this,” he said. “The bigger the government spending, the less the economy grows. That’s just the way it is.”

On a brighter note, the stock market is performing relatively well, with the S&P 500 near its all-time high, and corporate earnings and dividend yields are strong, he said. The challenge is getting companies to invest that cash in expansions and new hires to help bring the unemployment rate down.

With the presidential election looming in November, those are keys to a successful administration, Augustine said.