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.