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Kiplinger 2012 Economic Outlook
The U.S. economy will grow about 2% in 2012, roughly the same as in 2011, enough to avoid another recession but not enough to make much of a dent in unemployment.
Faster growth in the second half of 2011 will rescue the U.S. from a downturn, and shows that pent-up consumer demand and business confidence provided enough momentum to overcome a summer of stock market gyrations, a European financial crisis and the debt limit drama in Washington.
After growing at an annual rate of only 0.9% for the first half of the year, gross domestic product grew at a 1.8% rate in July, August and September. Business investment surged at a 15.6% annual rate, accounting for half of the increase in GDP. Consumer spending rose at a 2.3% annual rate — not great, but well above what would point to recession.
Unfortunately, growth isn’t accelerating as it normally does in a recovery. The economy will grow a bit faster in the last quarter of 2011 but slow down agian in 2012, indicating that a sustained recovery still hasn’t started, more than two years after the end of the Great Recession.
There is little prospect of a major fiscal or monetary stimulus, or any other development that might boost growth. The economy should stay out of the ditch, but it will remain vulnerable to possible shocks — war, terrorism, an oil price shock or a natural disaster. One or more of these could tip it into recession.
Consumer spending, which accounts for about 70% of GDP, is positive but shows no signs of driving a sustainable recovery. The 1.7% annual growth rate in the third quarter was faster than in the first half of the year, despite a drop in consumer confidence in mid-October to levels not seen since the depths of the Great Recession. Falling income and stubbornly high unemployment are weighing on the minds of consumers, who are, however, borrowing more to spend, with car sales a bright spot.
The U.S. economy continues to add jobs, but not at a pace that signals a solid recovery.
We expect this year’s pace of job creation — 130,000 a month through November — to accelerate to only 150,000 a month next year, adding up to 1.8 million new jobs. That should move the unemployment rate, which has averaged 9% this year, down to about 8.5% at the end of next year.
Job growth in November of 120,000 was enough to cast out thoughts of another recession. But almost half the increase came in retailing, with some strength in hiring at bars and restaurants, temp agencies and health care. Manufacturing added only 2,000 jobs, while construction shed 12,000.
November’s drop in the jobless rate, to 8.6% from 9%, is a gift that looks nice under the tree but is a little disappointing when the wrapping comes off. Half the drop is due to a shrinking labor force. Ordinarily, a big share of those who choose not to look for work are those who want jobs but are discouraged. One bright spot is that the number of these discouraged workers didn’t increase in November. The jobless rate, which includes discouraged workers and part-timers who want full-time work, fell to 15.6% from 16.2% in October.
A concern is an increase in those unemployed for 27 weeks or more — 43% of all the jobless, up from 42.4% the previous month. Expect the unemployment rate to move up a bit in early 2012, then decline again but end the year above 8%.
A key number to watch is private employment because it represents the lion’s share of jobs and points to the overall direction of the economy. State and local governments, which typically add jobs during recovery from recession, instead are paring back.
Health care jobs will continue to increase next year, though the pace is slowing. There’s still uncertainty about the scope and pace of President Obama’s health care reform measures.
There will be only a modest rise for construction. After shedding 2 million jobs during the recession, there’s little room to fall further. But gains will be moderate, especially on the residential side, where the inventory of unsold homes remains high. Manufacturing will post a very small gain, too. Firms are putting their money into equipment, and productivity gains enable most to produce more with fewer workers.
Medium- and long-term interest rates, near record lows, will rise modestly in 2012, despite continued efforts by the Federal Reserve to hold down long-term rates by purchasing more longer-term bonds.
The 10-year Treasury note, the benchmark for medium-term rates, will rise from near 2% to between 2.5% and 3% by the end of 2012. Home mortgages, averaging about 4% for a 30-year fixed-rate loan, will inch up toward 5% by 2013.
In September, concerned about slow economic growth, the Fed announced it would sell up to $400 billion in medium-term bonds and buy an equal amount of longer-term debt, putting downward pressure on long-term rates. This will continue into 2012, but it won’t prevent rates from edging upward.
Until recently, the Fed relied on rates for overnight loans to influence long-term rates, but with that target near zero since 2008, it has used other means, such as bond purchases.
There were no changes to interest rate policy at the December 13 meeting of the Fed’s policy-making arm, but Fed officials signaled that they are working toward a major shift as soon as their next meeting January 24-25.
That’s when Fed watchers expect the Federal Open Market Committee to announce not only a numerical target for interest rates but also some detail on the levels at which inflation and unemployment would warrant a change in policy. Such a change would be starkly different from just a decade ago, when the Fed did not even spell out what its goals were for interest rates, leaving financial markets to rely on leaks and hints to guess the central bank’s intent.
At the January meeting, the Fed will release new quarterly economic projections, and Chairman Ben Bernanke will also hold a post-meeting press conference. So it’s a logical time to announce a big policy change, which Bernanke has signaled through off-the-record chats he holds regularly with selected news outlets.
The policy shift is intended to avoid misinterpretation of the Fed’s intentions and won’t directly raise or lower interest rates. However, it could set up a fight with conservative Republicans, who have criticized Fed efforts to boost growth as planting the seeds of inflation. GOP presidential front-runner Newt Gingrich has joined the fray, calling for legislation to drop the Fed’s mandate to keep unemployment in check by trying to boost growth.
Solid growth in business investment through most of 2011 is slowing and won’t accelerate in 2012, as businesses show some caution in committing to putting money down on big-ticket items.
This spending by business — which comprises investment in buildings, equipment and software — will grow by 6% in 2012, after expanding by 8% in 2011. That’s not bad in an average year, but it’s a disappointing pace after the steep fall of the Great Recession, which slashed such investment by 19%. Even after a 17% gain in 2010, business investment is still running behind the level reached in 2007.
Business spending of 6% next year won’t spur much hiring – growth of 10% a year or more will be needed. We expect the economy will add about 150,000 jobs a month in 2012, short of the 200,000 or so needed to sustainably lower the unemployment rate.
Some factors point to an improving business environment in 2012. The recent infusion of capital into the European banking system eases concerns about a global financial crisis. And Congress seems to be moving toward a full-year extension of the payroll tax cut, which would remove a cloud over consumer spending.
Orders for durable goods — those lasting three years or more — surged 3.8% in November, but that was due largely to a huge jump for airplane orders at Boeing. Excluding transportation goods, durable goods orders increased 0.2% in November.
Census Bureau: Durable Goods Report
Census Bureau: Business Inventories
Census Bureau: Construction Activity
The slow-growing economy and steady to lower energy prices will lower consumer inflation to 2% in 2012, on the heels of a likely 3.3% rise in prices in 2011.
Although the overall trend for consumer inflation is down, pressures lurk that could rekindle it when the economy picks up in 2013, especially if Washington fails to take action to control the national debt. We expect little action on the debt during the coming election year.
Prices for wholesale goods, meanwhile, will rise 3% in 2012, after jumping roughly 6% in 2011. As measured by the Producer Price Index, wholesale prices tend to be more volatile than consumer prices, representing a narrower range of products, and often move out of sync with them.
Consumer prices are slowing already. The Consumer Price Index is up 3.4% over 12 months through November. After hitting an annual rate of 3.9% in September, consumer prices fell slightly in October and were flat in November. Both months reflected a drop in gasoline prices.
Look for West Texas Intermediate (WTI) crude oil—the benchmark for U.S. oil pricing—to trade in the $90- to $95-per-barrel range into the spring, though occasional sharp ups and downs will continue to be part of the landscape.
Recent volatility, which saw oil prices briefly top $100, doesn’t indicate any looming imbalance in supply and demand. Rather, it’s the product of traders jumping into commodities because they’re worried that European debt woes will worsen.
Of course, all bets are off if European countries decide to cut off Iranian oil in retaliation for the recent storming of the British Embassy in Tehran, but that is unlikely. Oil prices spiked in Europe when the flow from Libya was disrupted by revolution, and Europeans are unlikely to hurt their fragile economies by cutting off supplies from Iran.
Meanwhile, there’s more good news for motorists. The national average price of gasoline, now $3.22 per gallon, which has dropped 10¢ in the past month, will continue to spiral downward, to as low as $3.10 in the next few months—a welcome relief from $4-a-gallon prices this past summer.
For truckers and other consumers of diesel, the news isn’t so good. At $3.83 per gallon, it’s holding on to a relatively high price, largely because exports of diesel are on the upswing.
The cost of heating oil, now $3.82 per gallon—up 9¢ in the past two weeks—is sure to keep rising as colder weather takes hold, climbing to between $3.90 and $4.10 per gallon. A harsh winter, as some forecasters predict for areas such as the Upper Midwest, would keep further upward pressure on both natural gas and heating oil prices into 2012.
But natural gas continues to be a bargain. At Henry Hub, the pricing point for natural gas futures on the New York Mercantile Exchange, prices fell to $3.15 during this week’s market moves. Natural gas should trade in the $3.30 to $3.50 range until demand picks up with cold weather, when it could range from $3.60 to $4.00.
Housing prices aren’t quite done falling, with a 2% drop by the middle of 2012 followed by a 2% increase in the second half of the year.
That’s consistent with the latest numbers from the Standard & Poor’s Case-Shiller Home Price Index, which finds the pace of decline slowing from early 2011. After adjusting for seasonal variations in home prices, the index reports that prices fell 0.6% from September to October in 20 major metropolitan areas.
That is down 3% from October 2010, but an improvement from the dramatic rate of decline after the housing bubble burst in 2006. An end to the decline would give a major boost to the economy. The 33% drop since 2006 has cut into household wealth and discouraged consumer spending, which accounts for more than two-thirds of U.S. economic activity.
Other components of housing are starting to show improvement.
Sales of existing homes will rise 5% in 2012, to about 4.4 million, after a gain of 1% to 2% in 2011. The National Association of Realtors says that sales of single-family homes and condos rose 4% in November over October and 12% over the prior 12 months.
New-home sales will be flat next year, around 300,000. Construction of new homes, including rentals, is on the upswing, however, and will rise 15% in 2012, to about 680,000. This, from 590,000 starts in 2011, the fewest since recordkeeping began in 1959. Housing starts were up 9.3% in November, the best month since April 2010. The gain is largely due to builders putting up apartment buildings, most destined for rental.
Rock-bottom mortgage rates aren’t having much impact. The average 30-year fixed rate mortgage is just below 4%, about as low as ever, and won’t go up much next year as the economy stays in low gear. But more lenders are requiring a down payment of 20% and imposing other, more rigorous terms, discouraging some first-time buyers.
The NAR, which gathers data on sales and prices for existing homes, recently revised numbers back to 2007 and found that the crash in housing sales was 15% worse than previously reported. The revision doesn’t change prices. It gives some hope for firmer prices in the near future, however, because it lowered the inventory of unsold homes. At the current pace of sales, there is seven months of supply, the lowest since February 2007.
Dept. of Commerce: New-Home Sales
National Assn. of Realtors: Existing- Home Sales
Dept. of Commerce: Housing Starts
Retail sales growth will slow to about 6% next year from a slightly headier 8% pace this year. Even if the payroll tax cut is extended, which we expect, consumers will keep a tighter grip on their wallets in 2012. With wages stagnant, disposable income is unlikely to grow enough to keep up with this year’s sales growth, which appears to be winding up with a flourish this holiday season.
Sales growth will get off to an especially slow start early in the year: Most shoppers will take a break to pay off credit cards, which were used more frequently this holiday season than in recent ones.
So far this month, the number of shoppers is outpacing the number of a year ago, cheering most merchants, and the coming Saturday before Christmas is usually the second-busiest shopping day of the year. (Yes, we know that Dec. 24 this year falls on Saturday, but Dec. 17 will be far busier.) So-called Super Saturday saw nationwide sales hit nearly $8 billion a year ago. Rising consumer sentiment, up in December, is a plus.
The strong holiday season is helping to underpin steady fourth-quarter economic growth. Last month, retail sales, excluding autos and restaurants, were up 6.8% from the same month a year ago, though up just 0.3% from October. Consumers spent most heavily on electronics, mostly for gifts, and clothing as the weather turned colder. Stores were helped by a record $525 billion in sales racked up during the four-day Black Friday weekend — an increase of 16.4% from the same period a year ago. But dollars spent at grocery stores last month were down 0.3% from October, because food prices overall are lower now and many shoppers are opting for store brands and other cheaper options.
Expect U.S. exports to continue to grow in 2012, although at a slightly slower pace than this year. Exports are on pace to end 2011 up 15% compared to 2010. Next year, we expect them to grow about 12%, slightly more slowly due to a recession in Europe in the first six months of the year. The European Union is the United States’ largest trading partner when counted as a group.
In October, exports fell to $179.2 billion, down 0.8% from September, when monthly exports hit a new record. Exports of automobiles and consumer goods declined in October, as did industrial supplies, due to by a decline in commodity prices in August and September.
Imports are also expected to rise next year, but growth will be constrained by slower consumer spending growth in the second half of the year. Expect imports to increase 12% in 2012, compared to about 14% growth this year. Imports fell to $222.6 billion in October, down about 1% from September. The drop was mostly due to a decline in oil prices in August and September, with orders showing up in the October report. Other import categories remain strong, an indication that consumers are shrugging off persistently high unemployment in the United States and the prospect of a global slowdown.
The trade deficit is expected to rise in 2012 over this year, despite dropping in October for the fourth consecutive month. As a recession takes hold in Europe, exports will grow more slowly than imports, contributing to a larger trade deficit in the first half of 2012. The deficit with the European Union increased to $8 billion in October, from $6.4 billion in September, a sign of slowing demand for U.S. goods there.
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