Will 2012 Be A Repeat Of 2011?

Conjure up the image of enthusiastic Americans getting up in darkness on Black Friday and racing to shopping malls to spend hard-earned money. Now, contrast that with the heads of the major European countries acknowledging in the same week that the end of the euro is a distinct possibility.

On one side of the Atlantic, cautious yet stubbornly optimistic Americans began to open their wallets and spend. On the other side, the line in the sand is being drawn and the cost of short-term borrowing nearly doubled in the last quarter of 2011.

Whether Europe is able to identify a modern-day white knight country willing to lend multiple distressed European countries massive amounts of money at below-market interest rates, or whether the European Central Bank concludes it has no choice other than to print money, the end game in Europe may play out in the early part of 2012.

If the dark cloud hanging over Europe does not go away, what does this mean for American businesses? If Europe does fall back into its second recession in the last three-plus years, will they take us with them? Will the 27 percent of all American exports that are currently sold to European buyers find another home in China, Brazil or India? For years, the talk has been of Europe decoupling itself from its dependence on the United States. Now we’ll find out if the reverse is true.

The Scene Here At Home

Other indicators in the U.S. are mostly positive, in spite of what has been happening in Europe. The U.S. economy will likely grow about 2 percent in 2012 (roughly the same as in 2011), which is enough to avoid another recession but not enough to make much of a dent in unemployment. Faster growth in the second half of 2011 rescued the U.S. from a second downturn. It also shows that pent-up consumer demand and business confidence can indeed provide enough momentum to overcome a season of stock market gyrations, a European financial crisis and a debt limit drama in Washington.

After growing at an annual rate of only 0.9 percent for the first half of the year, gross domestic product grew at a 2-percent rate in the latter part of 2011. Business investment surged at a 15.6-percent annual rate, accounting for half of the increase in GDP. Consumer spending rose at a 2.3-percent annual rate – not great, but well above what would point to recession.

As I’ve said in this column before, consumer spending may be important to our economy, but it is business investment that keeps us growing.

Unfortunately, growth isn’t accelerating as it normally does in a recovery. That’s been the big rub all along since June 2009. The economy will likely grow at the same pace through 2012, indicating that a sustained recovery still hasn’t started the way we would like it to – more than two years after the end of the Great Recession. There is also little prospect of a major fiscal or monetary stimulus, or any other development that might boost growth in the short run.

The economy should stay out of the ditch (so to speak), but it will remain vulnerable to possible shocks (typically war, terrorism, oil price shocks or natural disasters have been historic culprits). One or more of these could tip it into a temporary contraction, as we have seen in recent years.

The Jobs Forecast

Look for moderate job growth to continue in 2012, stumbling forward next year at a pace of about 150,000 net new jobs a month. That’s just a bit more than the growth of the labor force and will result in the current unemployment rate of 9 percent falling to around 8.5 in 2012, during which the economy will create about 1.8 million jobs. The economy created about 1.5 million in 2011. The private sector will add about 2 million jobs after creating around 1.7 million in 2011.

Private-sector job growth will continue while government employment continues to shrink. Federal job cuts have been a small share of public-sector job losses so far, but expect that to grow as deficit cutting in Washington accelerates. A good bet for gains next year are for temps and consultants. Tapping this source enables a firm to stay flexible in case their fears are borne out and the economy stalls instead of expanding further.

How About Housing?

Housing, the Achilles’ heel of the economy thus far, is showing signs of improvement. But the gains in 2012 will be small and won’t do much for economic growth. Home prices will fall a bit more (about 2 percent) through spring 2012 before making up that ground by the end of the year. Holding down a price rebound are the 3 million homes in the foreclosure pipeline. When they finally reach the market, they typically sell for up to 25 percent less than homes sold through normal channels, casting a shadow on prices throughout the neighborhood. Foreclosures will most likely drop significantly in 2012 but will still be somewhat of an anchor on prices.

Home construction will increase about 15 percent in 2012, most of it apartment buildings to serve the hot rental market. A sustained recovery in the building of single-family homes will require more of an improvement in job creation than is expected in 2012, so don’t anticipate a big gain on house construction next year.

Rock-bottom mortgage rates aren’t having much of an impact either. They’re historically low – around 4 percent for a 30-year fixed rate loan. They’ll stay close to that rate into mid-2012 and rise only slightly by year’s end. More banks are requiring a 20-percent down payment, a high hurdle for some, especially first-time home buyers.

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