Economy Should Be Brighter in 2012

The good news is that the 2012 economy looks relatively brighter than the economy of 2011.

Let me put on my economist hat and talk about what lies ahead:

  • Consumer confidence skyrocketed to its highest levels in eight months in December, 2011; a positive sign for us heading into the New Year. The Conference Board’s latest news release (December 27, 2011) announced that its monthly Consumer Confidence Index exceeded expectations by jumping by nearly 10 points to 64.5 percent, up from a revised 55.2 percent in November.
  • Consumer confidence matters a great deal since consumption amounts to nearly 70% of the economy.
  • Jobs have been the most serious concern in the last several years. The good news is that the year 2012 is ending on an upswing – five consecutive months of net new job growth of 100,000 per month – the longest streak since 2006.
  • There is more good news in the jobs area. The number of people applying for unemployment benefits in December 2011 is at the lowest level since April 2008 which suggests that layoffs may have nearly ended and hiring is most likely on the rise in 2012. Hopefully this is not just a seasonal quirk.
  • The December 20, 2011 Associated Press survey of leading economists concluded that net monthly job growth in the next 12 months will be 177,000 jobs compared to an average of 132,000 jobs a month in 2011.
  • Unemployment in 2012 will most likely be around 8.6 percent compared to 9 percent in 2011.
  • The overall economy will grow faster in 2012 than in 2011. Expect the real GDP, the broadest measure of economic activity, next year to be at 2.4 percent compared to nearly 2 percent in 2011. This is a significant uptick but not enough to make a major dent in the ranks of the unemployed.
  • Inflation and interest rates will remain low in 2012. This bit of very good news has not been noticed by analysts much in 2011.
  • Recent housing data such as new home starts and existing home sales have shown improvement. The mortgage rate is at a long time low. Home prices have steadily come down according to the Case Schiller Index of 20 Metro areas. One would think that this is a great buyer’s market. But the housing industry has remained in the doldrums despite the economic recovery. Why? A major reason is high unemployment. The other reason is the continuing problems in the housing finance system. As long as the foundational problem of housing finance is not fixed, the industry will remain a lukewarm sector of the economy.
  • Despite the nerve-wracking gyrations in 2011, the American stock market has remained a safe haven for the rest of the world as the S&P 500 Index heads toward a flat finish by the end of the year. The S&P index is ending the year significantly ahead of the stock market indices of Paris, Frankfurt, Tokyo, Shanghai, and Hong Kong. Why? There are several reasons. They include: 1) strong financial performance (profits) by American companies; 2) the Fed’s policies of low interest rate as well as injection of money into the economy; 3) the move by US investors to bring funds home in light of turbulence overseas.

The major downside risk facing the economy in 2012 is an external shock such as worsening of the debt crisis in Europe followed by a recession there. This may drag down the US economy as it is closely linked to the European economy. Other sources of external shocks could be centered in the Middle East.

The other major risk to the economy is the political gridlock in Washington that has continued to seriously hamper much-needed legislative progress relating to the US economy.

My conclusion: Things will be better in 2012—Guarded Optimism.

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