As of this Monday, it’s the Fiscal New Year – each October 1st marks the new federal fiscal year for the U.S. government. But will it be a happy one for our economy and for your investments? Here’s what you need to know.
What is a Fiscal Year?
A fiscal year is any 12-month period over which a government, company, or organization budgets its spending for that year. It need not be the same as a calendar year. For the federal government, each fiscal year lasts from October 1 the prior year through September 30 of that year. So for example:
- FY 2012 went from October 1 2011 through September 30 2012.
- FY 2013 will go from October 1 2012 through September 30 2013.
The fiscal years used by major U.S. businesses may start at other times of year, but they usually coincide with the beginning of a quarter.
Will FY 2013 be a Happy One?
Conservative organizations argue that the last few fiscal years have left us with an “Obama hangover” characterized by heavy spending. Progressives respond that stimulus was – and remains – necessary to revitalize a struggling economy and accelerate economic recovery.
In January 2013 – just three months away – the Fiscal Cliff will hit. This is when a bunch of federal tax laws and provisions are set to expire, which will lead to massive spending cuts on the order of almost $500 billion in deficit reduction. Some of the policies that will change:
- Many of the 2001 individual tax cuts will expire
- Temporary payroll tax cut will expire
- New Affordable Care Act (ACA) taxes to be enacted
- Budget Control Act automatic spending cuts to be implemented
- Emergency unemployment ends, along with reduced Medicare payments
Though there are certainly advantages to reducing the federal deficit, such a sudden and massive change in federal spending could jolt our struggling economy, already experiencing a slow and drawn-out recovery.
Expert Opinions: What to Look Forward To In FY 2013
A combination of domestic and international pressures will test the markets in 2013. We ask a variety of financial experts around the country what they think is next to come for the U.S. economy as we face 2013.
Three major findings emerged:
1. 2012 Versus 2013: 2012 Saw Suboptimal Growth, But We Are Now Poised For Major Economic Change.
David Breuhan, Vice President & Portfolio Manager, Gregory J. Schwartz & Co., gives the state of play compared to this time last year and argues that the economy will continue to recover at a slow pace despite taxes on the rise:
“Businesses remain in very good shape with healthy balance sheets and a cautious approach to hiring. Equity markets, year to date, are up: Dow Jones 10%, S&P 500 14.6%, NASDAQ 19.6%. The greatest issue is political, specifically, policy uncertainty around the November Election; the Fiscal Cliff; the European Debt Crisis; and Israel and Iran foreign policy. The United States Federal Government Debt reaches $16 trillion and grows at $4 billon per day. Meanwhile, the Federal Reserve commits to purchasing $40 billion per months in MBS for an unlimited amount of time. This means fuel costs and food costs have increased due to stimulus and the artificial creation of credit in the banking system; markets are up, but individuals’ disposable personal income is greatly affected by rising costs. The worst possible policy would be destroying the purchasing power of the currency, which is hardest on middle class and the poor. The upcoming lame duck session of Congress may punt on the fiscal cliff until Q2 of 2013.
The Payroll Tax will increase from 4.2% to 6.2% on January 1, 2013. This will impact roughly 150,000,000 workers, and neither party shows as willingness to extend this tax. If the President is reelected and holds the Senate, Republicans may show some willingness to compromise on taxes, as long as the Democrats modify entitlements. A major deal in the framework of the Reagan O’Neill Social Security deal in 1983 may be possible. If Mitt Romney is elected, he will need the Senate to pass many of his programs. It is harder to get legislation through the Senate. The Israel/Iran Crisis will come to a head, anyone’s guess, and a minor strike could impact world markets in a very negative manner. If a war occurs, the dollar, treasuries and gold will rally. Housing will continue to recover, and the American economy will muddle along at 1 to 3% annual GDP growth.”
Jonathan Citrin, Founder and CEO of CitrinGroup, argues that 2012 was anomalous and that there’s a strong need for aggressive action to spur economic growth:
“The year 2012 was an anomaly as it pertains to markets and the economy. The United States added jobs consistently, though certainly not fast enough to make a marked impact on the unemployment rate. And, as markets went up, many other economic indicators gave additional cause for alarm. Simply, it was a year of mixed messages – Americans and others unsure exactly how to feel about the world’s largest financial engine. Despite considerable efforts of central bankers, the country was just unable to pull away from the residue of the global economic slowdown that commenced roughly six years earlier. It was a year of conflict, disagreement, and lackluster action, all leading to economic underperformance when compared to historic norms.
With a presidential election and slower than necessary GDP growth behind us, 2013 is well positioned to see the United States take large, necessary policy action toward substantiating an economic turnaround. Though the central bank (the Fed) has seemingly exhausted its tool belt, much remains to be desired by way of fiscal action to improve circumstances. Look for 2013 to bring significant change, albeit clouded in political banter from both sides. A slowing recovery and significant national debt leave legislators little choice but to act. That is, without swift, stern policy intervention, a negative economic outlook seems likely for not only 2013, but many years to come.”
Dwight Johnston, Chief Economist at the California and Nevada Credit Union League
(CCUL), a 9.5 million-member trade organization representing over 400 credit
unions, provides indicators that spell out continued economic improvement in 2013:
“The major headwind for the U.S. economy in 2012 has been Europe. The ongoing European crisis has pulled down those economies and been a drain on the global economy. This has hurt the earnings and, more importantly, business confidence of the largest U.S. employers with large global footprints. This lack of confidence has been the primary problem in the U.S. job market, and it’s nothing that either political party can fix. The consumer sector has been hampered by the lack of wage growth. Wages are just barely matching the rate of inflation, and net sales have reflected that. The bright spot has been the recovery in the housing market, but home values remain significantly lower in most areas.
These major factors will continue well into 2013 and likely beyond. There is much concern about the fiscal cliff, but this is not likely to be a significant event. This is an overblown event designed to give market pundits and politicos talking points. Even if the lame duck Congress fail to pass extensions, the extensions would be reinstated retroactively once the office holders are sworn in. Of greater significance will be the long-term budget deficit negotiations that will commence next year. Depending on the composition of players in Washington, this could be an event to watch for but it is entirely unpredictable. The Presidential election is mostly irrelevant. The problems and the battles in D.C. will play out as “abnormal” as usual regardless of the winner of the election.
The biggest risk to 2013 is a true implosion in Europe as the “kick the can” strategies of the past few years run out. This would not necessarily result in a recession in the U.S., but any recovery in jobs would be delayed. With QE Infinity likely to extend to buying treasuries, we could see negative interest rates on treasuries through 2 years and a sub- 3% mortgage rate. While this is good news for borrowers, people trying to save or live or interest bearing funds will continue to struggle.”
Carl Doerksen, Director of Corporate Development at Generational Equity, lays out the dangers of uncertainty when it comes to both individual and business decision-making:
“The real strength of the US economy in 2012 is that it continued to grow, albeit at a much slower pace than any one wanted. However, it did continue its moderate post recession expansion. In some regions of the country, that recovery is even stronger. On the jobs front, the news was mixed with only moderate growth in employment. However, low interest rates have begun to provide us with a moderate turnaround in the housing industry: a very helpful sign.
On the M&A front, where we operate, the number of deals closed is going to be lower than anticipated at the beginning of the year. Having over $400 billion in available capital with equity firms and over a trillion on corporate balance sheets, we expected a much stronger year of M&A growth. The issue that impacted M&A activity in 2012 is the same one affecting the overall economy and is slowing growth in general: Uncertainty. Simply put businesses, and likewise consumers, are unwilling to buy and invest because we are facing a variety of unprecedented unknowns.
Businesses, as well as individuals, are dramatically affected by uncertainty. Decisions to expand, hire, acquire companies and add new products are all delayed when uncertainty reigns. Businesses thrive when they know what the rules are. History has shown us that the US economy can grow under both Democratic and Republican administrations and Congresses as long as entrepreneurs and CEOs know what the rules are. If we get some clarity in policy making in Washington post election and some decisions are made to negotiate us away from the fiscal cliff in January, then it is quite likely that 2013 could be a solid year economically, much better than 2012.
Because of all this uncertainty, now more than ever before, business owners need to have exit strategies and plans in place. Being ready to act in advance of potential regulatory, tax, and economic changes is more important than ever.”
Roy Cohen, Career Coach and Author of The Wall Street Professional’s Survival Guide, analyzes what’s to come in 2013 in comparison with the past year, with an eye toward both jobs numbers and political pressures:
“In 2013 we will see continued high unemployment. Although the ‘reported’ numbers will drop, there is small comfort there. Real unemployment will remain in the high double digits. Many more people will exit the job market with fewer available opportunities. In this election year, there has been far too much talk but little action to nudge the economy, and programs that may be approved once a candidate is finally elected or re-elected will take months to shepherd through Congress and to implement.
Next, Europe’s weak economy will disrupt the global financial and industrial markets. The uncertainty will encourage companies to remain cautious with respect to investing in infrastructure and in adding headcount. Their appetite for growth through acquisition will also remain soft. As the threat of terrorism looms both here and overseas, resources devoted to protection will stretch budgets and increase taxes. That is a good development for people who work in the defense and technology industries but bad for the overall health of the economy. Money that would have been earmarked for services to the unemployed, like job re-training, will disappear.”
2. This Year’s Politics Will Play An Unusually Large Role in Determining FY 2013 Economic Outcomes.
David A. Houle, CFA and co-founder and portfolio manager at Season Investments LLC, primes us on the pressures politicians will face next year to get the U.S. on a path toward fiscal austerity:
“Over the past several years, government spending has been a tailwind for the economy primarily via all sorts of transfer payments to individuals. We have begun to see a global shift towards an increased focus on debt and deficits, so I believe we will begin to see the first hints of austerity here in the United States. This may come from either increased taxes or decreased spending, or both.
The mix between these two will depend heavily on the outcomes of the upcoming elections. This need for austerity will exist in tension with the desire – perhaps entitlement – for near-term economic growth. Elected officials will feel the dichotomy between pressure to produce short-term economic gains while also living up to their promises to fix the longer-term imbalances of our nation’s fiscal situation.”
Andrew Schrage, co-owner of Money Crashers Personal Finance, reflects on FY 2012 and what may be in store for 2013 after this November’s election:
“There certainly weren’t too many bright spots in the economy for fiscal year 2012. Job creation was better than in previous years, although still woefully insufficient. And some have claimed that the housing market finally bottomed out in 2012. However, unemployment is still at an unacceptable level, and consumer spending has been down for some time. Gas prices, although they fluctuated quite a bit, have remained high. On the other hand, the stock market seems to have been fairly unscathed by the rough performance of the U.S. economy. The DJIA has been well over 12,000 for the majority of the year.
The outcomes for FY 2013 may be heavily tied to the results of the election, though some economists have predicted a bleak 2013 no matter who wins. Having said that, the biggest determining factor will be the end result of the “fiscal cliff” crisis. It’s my opinion that as each day goes by with the possibility of us tumbling over the fiscal cliff, economic recovery will be stalled. But I believe that this supposed fiscal cliff is basically political rhetoric, and the crisis will be avoided. I am a firm believer that the U.S. economy is cyclical in nature – no matter what external influences are exerted upon it in terms of governmental intervention; it’s going to do what it’s going to do. I predict a modest lowering of the unemployment rate (under 7.5%) and that consumer spending will slightly rebound. I think the recovery will be slow, and there won’t be any strong recovery statistics until at least the latter half of the year.”
Terry Connelly, Dean Emeritus of the Ageno School of Business at Golden Gate University, lays out the three main questions that need answering in 2013:
“The main questions concerning the likely 2013 experience are (1) what happens to the U.S. ‘fiscal cliff,’ (2) what happens to the Eurozone sovereign debt crisis (will it rain on Spain); and (3) which way does the new government in China take the economy — is there a QE with Qi? What this all means is that the scenario of 2013 will actually be set in the final two months of 2012!
With respect to the fiscal cliff – as in 2011, it will all come down to what moves the Tea Party Republicans in the House of Representatives. My guess: another stock market swoon as we had to have back in 2008 when the same House of Reps refused to pass the TARP legislation to stave off a depression until the stock market crash.
This country is not Greece or Spain; we have plenty of wherewithal to pay our debts and to fund our basic social programs and to reform the tax code in a judicious way. But my sense is that, regardless of whether Romney or Obama is elected, the Tea Party folks who will be re-elected (not all, but most) will say they have a mandate, too, to gut the welfare state and they could care less if they bring on a recession, a credit downgrade, or even raise people’s taxes — they’ll just blame Obama and probably try to impeach him if he is re-elected. They will also bully Romney because they will say they own them his win. That said, a package should pass by Christmas avoiding a recession in 2013, but it’s no sure thing. If it fails, we will have an economic re-run of 2009 in 2013.
In China, the renewal of economic stimulus in the form of further reduction in bank reserve requirements, awaits the installation of the new Communist Central Committee, President and premier to occur from mid-October onward. We can expect a unanimous, coordinated move when that happens, which should stave off a ‘hard landing;’ that is, a GDP at 5% or worse in the Chinese economy in 2013. If these givens occur, then we should have reasonably positive 2013 results for the U.S. in terms of GDP (around 3%) and unemployment (down to 7%).”
3. Investors Need to Pay Particular Attention to Changing Tax Rates and Policies in 2013.
Charles Massimo, President of CJM Wealth Management with over $200 million under management, advises taxpayers to follow these steps to stay tax savvy with their investments in 2013:
“We encourage individuals to seek financial guidance to deal with the expected tax increases coming in 2013. In the mean time, I recommend doing the following:
Examine all your assets, especially long term ones; sell any with big
gains before year-end.- Do some tax loss harvesting by selling losses in your account rather
than waiting for them to possibly come back in price. What you don’t use, now you can carry forward indefinitely.- Consider converting your traditional IRA to a Roth IRA.
- If you are living off of portfolio income, examine how you are
getting that income. For instance, if dividends make up a big part of that
income you may have to come up with a new strategy since taxes on dividends will go up significantly.- Depending on your tax bracket, start building muni-bond holdings (vs.
corporate bonds).- If you own any rental real estate, start actively managing that real
estate since passive income will be subject to 3.8% surtax in 2013.- If the Bush taxes do expire, the ‘buy and hold’ approach will be back in favor. So look for long-term investments vs. those to trade for a quick profit.
- Review your estate plan, since this year’s tax increases may have a dramatic impact on what you leave to your heirs.
- Perhaps most importantly, seek out an experienced wealth and tax advisor to help you plan and navigate based on your individual circumstance. As they say on TV, do not try this at home.”
Jonathan DeYoe, CPWA & AIF and founder of DeYoe Wealth Management, reminds us that though markets will always fluctuate, we can expect certain key trends in 2013:
“I look forward to a couple things in 2013. I look forward to being one step closer to the resolution of some of our generation’s big problems. I don’t think Europe’s financial crisis will be resolved, but it will be closer. Our Fiscal Cliff, that has dominated so many headlines, will for better or worse be behind us – and markets have short memories. Next, China will in all likelihood have stimulated its economy even more towards the growth they need and expect to happen.
Whatever markets might do and however governments might respond, the CEO’s of the great companies in the US and around the world will take new information into account to find a way of producing goods and services that customers and clients want, while reducing the cost of that production. We will certainly move onward and upward, though as humans we can never move in a straight line.”
John McAdam, CEO of Pioneer Business Ventures and author of the upcoming “The One Hour Business Plan Foundation,” provides a positive lookout for small business loans and commercial debt:
“As a mergers and acquisitions advisor in 2012, I’ve noticed that banks are lending money again albeit with stricter lending criteria. Unfortunately though, unemployment has been extremely understated by the U.S. government: 12.5 million people? Yeah right! The job market for high paying jobs remains among the fiercest in terms of competition then it has been in generations. In 2012, I also observed that many business startups and innovations are taking too long to fail, recover, and get going again. So I wrote the book/program/course called The One Hour Business Plan™ Foundation to help innovators experience failure in simulation iteratively before going to market.
I also expect the volume of mergers and acquisitions activity to increase due to improved access to commercial debt in 2013. Based on my experiences, electronic commerce will permeate industry-leading organizations. Management team members will either acquire knowledge and training or get left behind and find themselves on the corporate waiver wire.”
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