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.