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The Economic Year in Review

12:00 AM, Dec 22, 2012 • By IRWIN M. STELZER
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This is a good time to see where we have come during the year now coming to a close. Some things haven’t changed very much, or so it might seem. When the year began, households reported that 142 million Americans held jobs; right now, 143 million are in work. The labor force participation rate—the portion of workers in the labor market—was 63.7 percent when we (or some of us) were sleeping off New Year’s Eve hangovers, and now stands at 63.6 percent.

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Fortunately, the labor market has done more than return to where it was on January 1, after a long period of deterioration: it has improved modestly. The unemployment rate fell during the year to 7.7 percent, the lowest level since December 2008, and down from 8.3 percent in January of this year. The number of unemployed dropped from 12.8 million to 12 million. (These and other data courtesy of the Manhattan Institute’s Diana Furchtgott-Roth, who has no responsibility for my interpretations of these numbers.)

The even better news comes from the housing market, the auto sector, the consumer, and share prices. Home sales and prices improved enough to drive homebuilder sentiment to its highest level since 2006. The annualized rate of existing home sales last month was a bit over 5 million, almost 9 percent higher than in the first month of this year, and the highest in three years. Inventory of unsold homes has come down, and prices have gone up—by around 17 percent. Real estate brokers are complaining about a lack of inventory, and builders are complaining about difficulty in finding skilled construction laborers. Bids in excess of asking prices are rearing their wonderful head from Miami to New York City, especially at the high end of the market, where record-low mortgage rates are available to buyers with premium credit ratings.

Automakers are also cheerier than they were at the start of the year. Sales of cars and light trucks rose by about 15 percent during the year. That contributed to a better-than expected revision of the estimate of third quarter GDP growth, from 2.7 to 3.1 percent. The revised growth figure is below the first quarter’s 4.1 percent, but above the feeble 1.3 percent in the second quarter. Perhaps most significant has been the upward revision in personal consumption expenditures in the third quarter, and reports late last week that both consumers’ expenditures and personal incomes showed a healthy increase in November. Not bad for an economy many feared would be in recession.

It seems that the end of massive lay-offs has encouraged those who have not been made redundant to feel more secure in their jobs. Consumer confidence bounced around during the year, but is ending at an index level of about 74, after starting the year at close to 65, a 14 percent jump. That this improvement in confidence occurred in the face of an appalling display of intransigence and name-calling by the president and Republican congressional leaders is a tribute to the average American’s ability to ignore politics during the key final stages of the college and professional football seasons.  

The year also saw two important developments on the policy front. Ben Bernanke’s Federal Reserve Board decided to set its sights on reducing the unemployment rate, and promised to keep interest rates at zero until the rate came down from its current level of 7.7 percent to at least 6.5 percent. Or longer, if the decline in unemployment proved to be due to a fall-off in those who had been looking for work, but became too discouraged to continue the hunt. That made it likely that zero or, perhaps, 1 percent interest rates would prevail until 2017—bad news for savers and pensioners, good news for profligate debtors, including the U.S. government, all of whom now face the possibility of paying off their debts with cheap, depreciated dollars, in effect default by another name. Unless the Fed’s forecasts suggest that inflation is likely to rise at a rate in excess of 2.5 percent two years out, in which case the Board might tighten. Let’s hope that the Fed’s economic forecasters are really, really good at what they do, which many doubt.

So it should come as no surprise that the price of gold, believed to have some intrinsic quality that makes it an inflation hedge, is ending the year about 4 percent above where it was when 2012 began. Or that the dollar is down against both the euro and sterling, even though those are the currencies of economies in recessions while ours is growing. If the printing presses run at top speed, can inflation be far behind? So far, no sign of that dreaded currency depreciator and investors in the U.S. refuse to panic even though the Fed and other central banks have decided to downplay their roles as inflation-fighters and turn their hands and powers to stimulating their economies.

That is a nothing less than a policy revolution, and as the Wall Street Journal points out, “Revolutions are rarely victimless. … Expect long-dated bonds to suffer and currencies to fall as central banks compete on stimulus.” Robert Samuelson, an economist and author of The Great Inflation and Its Aftermath adds in a recent column, “the Fed has tried this before and failed—with disastrous consequences.” Partly because the Fed’s zero interest rate policy prevents investors from earning anything approaching satisfactory returns on bonds, their hunt for yield led them to buy shares: As we approach Christmas, the Standard & Poor’s 500 share-price index is up about 14 percent from the first trading day of 2012.   

The monetary policy gurus created a revolution; their fiscal policy counterparts created yearlong uncertainty. The president refuses to cut spending significantly, or to reform the tax code to increase the taxman’s take without stifling growth. Republicans refuse to raise tax rates, even on earnings above $1 million, as the speaker learned to his pain at weekend. The year opened with the nation on the brink of what Bernanke was the first to call “the fiscal cliff.” Whether there is a deal between now and year-end, we will enter 2013 staring into an abyss—a debt to GDP ratio so high that growth becomes impossible. It now is likely that we will add about $1 trillion to our debt mountain in every remaining year of the Obama administration, as we did this year.  

So the economy has inched forward this year, with the labor market improving, the economy growing modestly on the back of the housing and auto sectors, and consumers increasingly optimistic. Shareholders have done well. But the tone of our politics remains rancorous, with fiscal policy on course to produce endless deficits. The Fed has announced a revolution in monetary policy, a borrow-now-and-pay-later program to accommodate the politicians by buying their IOUs. A mix of the good, the bad, and the ugly.

Next week: what all of this portends for 2013. Meanwhile, even in the absence of peace on earth, do enjoy this season of goodwill

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