If you liked 2011, you’ll probably love 2012

Polit­i­cal grid­lock, strained fam­ily bud­gets, finan­cial crises through­out the euro-zone, mediocre U.S. employ­ment and eco­nomic growth… all of these things and more that exem­pli­fied 2011 are likely to con­tinue into 2012. And all of this despite the per­cep­tion among many econ­o­mists that 2011 ended on a strong note that may pos­si­bly con­tinue into 2012.

Of course, we’ve heard this siren song of “good times are just ahead” more than a few times, includ­ing one year ago, as the nation’s prog­nos­ti­ca­tors pro­claimed that strong eco­nomic growth was unfold­ing, even as the econ­omy nearly came to a stand­still dur­ing the first three months of 2011. Could the opti­mists be right this time? No doubt they could, but plan­ning for such a happy-faced out­look would prob­a­bly not be wise for a num­ber of reasons.

First, it seems likely — at least to this econ­o­mist — that many ana­lysts are mis­read­ing the strength of the con­sumer sec­tor based upon devel­op­ments late last year. Since Black Fri­day last Novem­ber, retail ana­lysts have been pro­claim­ing Christ­mas, 2011 stronger than antic­i­pated, with retail­ers clear­ing out inven­to­ries, though they did have to slash prices to get mer­chan­dise mov­ing out the door. While final num­bers will not be out for a while, sup­pose this analy­sis is true. Does this mean the con­sumer has come back to life? No.

To be able to con­tinue spend­ing on a high-flying basis, con­sumers must have the finan­cial clout to do so. Sadly, this is not present in a way that sup­ports any­thing much beyond slowly expand­ing spend­ing growth. After adjust­ing for infla­tion, aver­age weekly earn­ings are down on a year-over-year basis. Under such cir­cum­stances, the impe­tus for more spend­ing must come from some other source such as sav­ings or bor­row­ing. But sav­ings rates have been on the decline in the past few months (to help pro­pel those late-2011 expen­di­tures) and finan­cial insti­tu­tions remain very cau­tious about pro­vid­ing too much new credit in an envi­ron­ment of uncer­tain growth.

What’s more, many ana­lysts are seem­ingly equat­ing total retail spend­ing with total con­sumer spend­ing. In fact, they are most cer­tainly not the same thing. Of total con­sumer spend­ing, only about 42 per­cent of it occurs within the retail sec­tor. The remain­der of con­sumer spend­ing is on var­i­ous types of ser­vices, such as health care, tele­phone ser­vices, enter­tain­ment ser­vices, home energy needs such as elec­tric­ity, nat­ural gas, etc. At times, con­sumer spend­ing on ser­vices and at the retail level (on a year-over-year basis) move closely together and at other times they do not. At present, they do not. So, those antic­i­pat­ing a resur­gent con­sumer who will help reen­er­gize 2012 U.S. eco­nomic growth are likely to be disappointed.

On a sim­i­lar note, some econ­o­mists are sug­gest­ing that the hous­ing sec­tor has finally reached a bot­tom, and 2012 will con­tinue to trend upward. As appar­ent proof, these opti­mists point out a surge in new hous­ing starts of 5.7 per­cent in Novem­ber com­pared to Octo­ber. What does not seem to get reported is that most of this gain was in multi-unit starts, which is to say, apart­ments. In essence, some investors are bet­ting that single-family hous­ing will remain weak and are thus build­ing more apart­ment com­plexes; pro­duc­ing a tem­po­rary surge in hous­ing starts. As such, even as the num­ber of starts goes up, it may be due to the con­tin­u­ing prob­lems in hous­ing, includ­ing the effect of next prob­a­ble wave of foreclosures.

As an addi­tional fac­tor hold­ing down growth poten­tial in 2012, who can rea­son­ably expect improve­ment either domes­ti­cally or inter­na­tion­ally in the paral­y­sis grip­ping the gov­ern­ment sec­tor? Here at home Con­gress and the pres­i­dent are likely to remain at log­ger­heads in 2012, fos­ter­ing con­tin­u­ing uncer­tainty among busi­ness deci­sion mak­ers. And in an uncer­tain envi­ron­ment — par­tic­u­larly in a pres­i­den­tial elec­tion year — the wis­est course of action may be to post­pone impor­tant deci­sions, includ­ing new hir­ing needs. Inter­na­tion­ally, the 17 mem­ber nation euro-zone will likely con­tinue to floun­der under the weight of bud­getary prob­lems in Greece, Italy, Ire­land, Spain and Por­tu­gal, which already seems to have dri­ven the entire region into reces­sion dur­ing the final quar­ter of 2011. Over time, our exports to this area will suf­fer, as will those of other coun­tries such as Japan, China, Brazil, etc. As well, any euro-zone finan­cial mar­ket insta­bil­ity could spread to other nations and sig­nif­i­cantly reduce lend­ing capabilities.

In short, another year of eco­nomic drift and gov­ern­ment inac­tion seems nearly unavoid­able. Next week’s col­umn will put some meat on this, at present, bare-bones outlook.

Dr. James New­ton serves as chief eco­nomic advi­sor to Com­merce National Bank and is an aux­il­iary fac­ulty mem­ber in eco­nom­ics and sta­tis­tics at OSU-Marion and OSU-Newark. Dr. Newton’s views do not nec­es­sar­ily reflect those of Com­merce National Bank or OSU-Marion/Newark.

Posted by Jim Newton on Jan 4 2012. You can follow any responses to this entry through the RSS Feed. Comments can be made below.