01.03.13

December’s Economic Signs Looked Positive Amid Uncertainty

As the fiscal cliff approached, the ultra-rich freaked out, rushing to buy apartments and clamoring for dividends. But most companies and consumers kept calm and carried on. By Daniel Gross.

We’re starting to get a clear look at what the economy looked like in December. The month that kicked off with grief (Newtown) was hampered by the post-Sandy fallout in the Northeast and paralyzed by the rising insanity in Washington. As the budget talks went down to the wire, there was a rising uncertainty about tax rates, for government contractors, and in the markets.

And yet the data we’ve seen thus far shows that Americans were generally like the stiff-lipped Brits in World War II—they kept calm and carried on. Neither consumers nor businesses really acted in December like they were freaked out by the impending fiscal cliff.

Christmas retail sales may have been disappointing, although blame can be laid in part on the fact that the eastern seaboard, one of the country’s wealthiest and most densely populated regions, was recovering from the after-effects of Sandy. When you don’t have electricity and are faced with coughing up several thousand dollars for a new generator, it’s likely you’ll spend a little less at the mall.

But there are signs that the largest U.S. retail sector was quite healthy. Throughout the day on Thursday, auto manufacturers reported their December sales. And the news was generally good: Chrysler, up 10 percent from last year (PDF); General Motors, up 5 percent (PDF); Toyota, up 13 percent.

The ISM Manufacturing report on business came in at 50.7 percent (any reading above 50 indicates the sector is expanding), reversing November’s decline. The companies responding to the survey indicated that production, new orders, employment, and exports all grew in December.

Remember in October and November, when businesspeople were threatening to Go Galt, to just shut down and fire all their employees in the event of an Obama victory and the inevitability of higher taxes? That was always a bogus threat. And now we have the data to prove it. On Thursday, Challenger, Gray & Christmas reported that the number of announced job cuts in December fell to 32,556, “the second lowest monthly of 2012.” That total is off 43 percent from the November figure and down 22 percent from December 2011. It could be that employers didn’t let people go because they were in the Christmas spirit. Or it could be that they were simply holding onto workers because they had sufficient orders to keep them busy. In other words, they were more focused on hiring than firing.

That explanation makes more sense in light of the ADP National Employment Report, in which the payroll-processing company estimates the number of private sector jobs created in the month. ADP concluded that employers added 215,000 positions in December. Meanwhile, it revised November’s previously reported increase from 115,000 to 148,000. December represented the best single month since February 2012. And guess who was doing the hiring? While giant companies, those with 500 or more workers, added 87,000 posts, medium businesses, those with 50–499 employees, added 102,000, and small businesses added 25,000. “The job market held firm in December despite the intensifying fiscal cliff negotiations in Washington,” said Mark Zandi, chief economist of Moody’s Analytics, which helps ADP tally the figures. “Businesses even became somewhat more aggressive in their hiring at year end.”

Production, new orders, employment, and exports all grew in December.

Only the really rich freaked out. Concerned that the New Year would bring sharply higher taxes on dividends, companies—especially those controlled by small groups of shareholders—shoveled cash out the door. As Matthew Zeitlin has documented in these pages, some well-known firms had to rent forklifts to move all the cash out before Dec. 31. According to the research firm Markit, 233 special dividends were declared in the fourth quarter. That’s 7.5 times more than is typical for the fourth quarter. All told, the special dividend payouts totaled some $30.9 billion. It turns out, of course, that the dividend-tax worrywarts need not have freaked. As part of the fiscal cliff deal, qualified dividends will only be taxed at 20 percent, up from 15 percent—and not as ordinary income, which can be taxed at a rate as high as 39.6 percent.

A subset of the ultra-rich freaked out, too, for different reasons. Sellers of very expensive apartments in New York were concerned that capital gains would rise sharply in the New Year, from as low as 15 percent to the 25 percent pre-Bush levels. And so the last few weeks of the year, which are usually slow for the real-estate crowd, turned into a frenzy. Mortgage brokers, lawyers, and appraisers all had to cancel their vacations and work around the clock. Total sales of co-ops and condos in Manhattan rose 40 percent in the fourth quarter of 2012 from 2011, according to Brown, Harris Steven, while $10 million-plus property sales were up 44 percent. “It was the most active fourth quarter I have ever experienced in my entire career,” Dolly Lenz, vice chairman of Douglas Elliman, told CNBC. The activity was so intense that there is now a severe shortage of fancy apartments for sale in New York.