Part Two: If you liked 2011, you’ll probably love 2012

In last week’s col­umn I began what some may view as an overly pes­simistic analy­sis of the state of Amer­i­can con­sumer finances, as well as the depress­ing state of affairs in the Euro­pean Union. Since that time, the Labor Depart­ment issued a final jobs report for 2011, with the new (net) pay­roll jobs expand­ing by 200,000 and the unem­ploy­ment rate falling to 8.5 per­cent from a revised Novem­ber fig­ure of 8.7 per­cent. Ah, proof pos­i­tive – some might say — that “pes­simists” (such as myself) are sim­ply a bunch of naysay­ers who are fail­ing to appre­ci­ate the favor­able growth path the U.S. is finally being to traverse.

I hope this belief is cor­rect. I hope both peo­ple and busi­nesses find 2012 sig­nif­i­cantly bet­ter, and that less-than-flattering com­par­isons to last year’s mediocre eco­nomic results are unfounded. I just don’t hap­pen to believe such an out­look is likely. Unfor­tu­nately, the past cou­ple of years have unfolded with much the same opti­mism in the early part of the year, only to see that opti­mism shat­tered as the year progressed.

Last Jan­u­ary the con­sen­sus fore­cast indi­cated eco­nomic (GDP) growth would be in the 3–4 per­cent range. In actu­al­ity, the U.S. will likely close out 2011 with growth of about half that amount. And remem­ber 2010, when the year started out with such hope that the Obama admin­is­tra­tion indi­cated it poli­cies were work­ing and touted the upcom­ing “recov­ery sum­mer?” By the time sum­mer, 2010 rolled around, talk about the won­der­ful eco­nomic revival seemed like a cruel joke to the mil­lions of unem­ployed Americans.

To be sure, my out­look is prob­a­bly more restrained than that of most other ana­lysts at this point, but that is not the equiv­a­lent of say­ing I am “pes­simistic.” I would like to think of myself as a prag­matic opti­mist. In fact, I think GDP will grow in 2012, but at a rate that is remark­ably sim­i­lar to that of 2011. And I do think U.S. labor mar­kets will cre­ate slightly more jobs in 2012 than in 2011, but not so many as to have a favor­able influ­ence on the nation’s high unem­ploy­ment rate.

Get­ting down to specifics, after what will likely be a rea­son­ably good fin­ish to 2011 (with GDP expand­ing about 3 per­cent in the fourth quar­ter), my lat­est fore­cast for Com­merce National Bank calls for eco­nomic growth to mod­er­ate to within the 1.5–2.0 per­cent range dur­ing the year’s first half. For the sec­ond half of 2012, eco­nomic growth should solid­ify around the 2 per­cent figure.

Why so dour in my “prag­matic opti­mism,” par­tic­u­larly given an improved pace of job cre­ation in 2012? I believe a num­ber of fac­tors will hold down growth. Export activ­ity will become less favor­able, as a euro-zone reces­sion takes hold and reduces their abil­ity to buy U.S. goods and ser­vices. And with the euro under assault, its value will drop. This euro depre­ci­a­tion will cause Amer­i­can goods and ser­vices to be more expen­sive and fur­ther reduce export activ­ity. And with a strong dol­lar, our ability/desire to import from the EU increases, and causes a sub­sti­tu­tion away from some domes­ti­cally pro­duced goods and services.

Fur­ther, as dis­cussed last week, the state of con­sumer finances will likely remain weak, even as employ­ment oppor­tu­ni­ties expand. It is impor­tant to rec­og­nize just how debil­i­tat­ing the impact of years of reces­sion or slow-growth can be. Imag­ine your­self being part of a fam­ily where one or more income-earners have lost their job for some con­sid­er­able period of time. Even as one or more fam­ily mem­bers become re-employed, the finan­cial dev­as­ta­tion may take years to reverse, with that family’s cur­rent and future spend­ing held down by the need to dig out from under their accu­mu­lat­ing, unwanted debts.

Often, this seems the prob­lem with some mem­bers of the eco­nom­ics pro­fes­sion. They assume sim­plis­tic rela­tion­ships exist (such as between new jobs and increased con­sumer spend­ing) and fail to con­sider the chang­ing dynam­ics within a com­plex economy.

So, even as new job oppor­tu­ni­ties arise (which I am expect­ing to be in the range of 1.75–2.0 mil­lion pay­roll jobs in 2012 – above my fore­cast last year of 1.5–1.75 mil­lion jobs, and the actual fig­ure of 1.64 mil­lion jobs cre­ated in 2011), this does not nec­es­sar­ily sup­port a “vir­tu­ous cycle” of expanded eco­nomic activity.

Next week, I will share a few last thoughts about the 2012 U.S. eco­nomic out­look, as well as what it may mean for Ohio and the greater Colum­bus area.

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 11 2012. You can follow any responses to this entry through the RSS Feed. Comments can be made below.