Naroff Economic Advisors 2012 Outlook

Joel L. Naroff
President and Chief Economist

The Outlook for 2012

In a Nutshell: “The economy looks to be better in 2012 but we still have to get over the European debt hurdle first.”

What an amazing year. It started out positively as businesses were hiring again, confidence increased and growth seemed poised to change gears. But then gasoline prices broke the critical $4.00 a gallon level and consumers got worried. There was also a divisive debate over the debt ceiling, a downgrade of the U.S. debt, huge market volatility, a devastating tsunami which cut the Japanese supply chain and the European sovereign debt crises. When you come to think about it, the continued growth of the U.S. economy is amazing and shows just how resilient it is.

The economy ended 2011 on a high note. If economic activity is to accelerate, the consumer has to re-engage and that is happening. While growth during the summer was disappointing, households are spending money again. Whether it was Black Friday weekend, Cyber Monday or any other major sales event, the comparisons with 2010 numbers were really good.

Not only were people hitting the malls and wearing out the internet, they were also revisiting the dealerships as vehicle sales picked up. In other words, the long lost consumer is blowing the dust out of the wallet and opening it up.

While economic momentum was building entering 2012, that doesn’t mean strong growth is a given. The current restraints of a soft housing market, fiscal austerity, limited credit and a dysfunctional Washington will not disappear soon. And of course the election campaign can only create more disgust about our elected representatives.

But the real concern is Europe. Greece is bankrupt and other countries are having difficulty meeting their responsibilities. The European monetary union must also become a fiscal grouping but herding the cats is difficult. Not many nations want to give up some of their budgeting freedom even though that is necessary if the Euro is to survive.

Undoubtedly, budget cuts and tax increases will occur throughout Europe and that means the continent is likely to go into recession, if it isn’t already. That will reduce our exports as almost twenty percent of our foreign sales go to that part of the world.

The expectation is that the European Union will manage to do enough to get by even if they don’t do all that is needed. That should prevent a financial crisis. If that is the case, though the impact on the U.S. growth will be felt, it will not be large enough to drive us back into recession.

I am optimistic about 2012 and my forecast reflects that. As long as Congress passes the payroll tax extension, growing consumer spending should cause hiring to rise and by mid-year we could be seeing solid, though maybe not spectacular job gains. That would cause the unemployment rate to decline and by year’s end could drop below 8%. That is way too high but the downward trend would be clear enough that job insecurity would fade and confidence would improve. That would further increase household spending and convince businesses to continue investing heavily.

The growing pace of consumption and capital spending should be supported by the low interest rate policy of the Federal Reserve. While tight credit and restrictive standards may be limiting lending, many households and businesses have refinanced and that is adding to cash flow and bolstering balance sheets. Simply put, firms and individuals will have the money to spend and they are likely to do that.

While there is tremendous uncertainty about the outlook, the pattern of better than expected economic reports clearly points to an economy on the rise. Until housing starts to pick up steam and it is a lot easier to get a loan, don’t expect robust growth to return. But barring a major European meltdown, 2012 should be quite a bit better than 2011.

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