Having recovered from my tryptophan induced nap after Christmas, I’m ready to provide my 2011 review and predictions about the US economy for 2012. As always, once the tinfoil hat is off, I’ll disavow any wrong predictions made by the author (that being myself).
So here goes:
2011 GDP growth will come in at a little under 2%. That beats a recession but isn’t enough for real growth. My estimate for 2012 is slightly better at 2.5%. That’s worse than most post recession recoveries which are generally 4-5%.
Jobs. 
There are a couple of keys to recovery and one is the job market. What has gone largely unnoticed is that the job market has improved. There has been a net job increase exceeding 100,000 per month over the last 5 months - the last time we had numbers that good was 2006. Additionally, new unemployment claims dropped to their lowest level since 2007. All of this is positive, but we are still not seeing growth. When you add young people who start working and people who come back into the job marketplace, 100,000 new jobs per month is a replacement number not a growth number.
At 2011 year end, the unemployment rate is a stubborn 8.6%. I expect next year to see a decrease to 8.2% by year end 2012.
Housing. This is the recession’s most difficult problem. Current forecasts predict housing will be stuck until 2013. There is a huge glut of unsold homes, both those now for sale as well as an estimated 1.6 million homes that are vacant and not for sale yet or have people in them who are not paying (called the shadow inventory). This will continue to drag down mortgage equity and pricing. This is very regional so some parts of the US are doing quite well (North Dakota), while others are not (Stockton, CA).
Business lending. There are two issues effecting lending today, supply and demand. Normally they move opposite to each other but now we have both low supply ( little access to money) as well as low demand (few businesses who wish to borrow). In 2011 lenders began easing requirements from incredibly tight parameters. Credit started to release for for the largest companies but is only now making its way to the small businesses. The other side is demand. For the last three years, businesses have been both de-leveraging (paying off debts) and cash hoarding. What businesses have not been doing is much investing, which is the activity that creates new GDP and new jobs. In 2012 there won’t be an increase in cash hoarding and will be an increase in capital expenditures. There won’t be a huge rush for expansion - even though this is a great time to do so.
Risks. There are couple of risks that could derail the US recovery. Here is what I think they are:
Europe. 
The continent is struggling. The Eurozone is in a no-win situation in that they can’t let Greece, Spain or Italy fail; but the costs to prop them up both monetarily and politically are enormous. Europe will continue to struggle and is already falling into a recession. If the recession is mild it shouldn’t derail the US recovery. If it becomes a major one and if Europe allows Spain and Italy to fail, all bets are off for US and the rest of the world.
US politics. If 2011 showed anything it’s that politicians are more interested in party politics than in crafting good economic solutions (in this writer’s opinion). The downgrade of US debt in 2011 was both unnecessary and avoidable. The consequences of that were not felt immediately, but will be a problem long term. Since then the US political system has lurched from artificial crisis to crisis with no end in site. In 2012, nothing the politicians will do will help the US economy in a significant fashion (a bipartisan agreement along the lines of the Bowles/Simpson program would help, but that is about as likely as snow in Washington DC in June). While I don’t think that the political system will do much to further hurt the US economy, a government shutdown or default on paying its obligations would be a problem.
Okay, here’s the summary:
For 2012 I predict (drumroll please). GDP will be slightly better at 2.5%. Unemployment will be slightly better at 8.2%. Real estate prices will remain flat in 2012 or drop slightly. Access to capital will gradually increase and rates will stay the same as they are today. In short a continuation of 2011′s almost imperceptible recovery – but better than the alternative.
Feel free to tell me what your predictions are.
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