Now that you have read the results of the various economic forecasting models that have served so many so badly in recent years—they are predicting the U.S. economy will grow in 2012 at an annual rate of between 1.5 percent and 2 percent—let me offer an alternative way of looking at things. It is called ‘pick your if.’
If you believe that the recent decision of the European Central Bank to make unlimited cash available to eurozone banks for the next three years, and that the meeting next week of German chancellor Angela Merkel and French president Nicholas Sarkozy will solve the problems created by excessive debt of some eurozone countries, you will heave a sigh of relief. You will then not have to worry whether the inevitable Greek default will be the first step towards a Lehman Brothers moment, with liquidity drying up, bank credit shrinking, and a deep recession settling over Europe, hurting American banks and exporters.
If you believe that the recent jagged but downward trend in claims for unemployment insurance foretells a drop in the unemployment rate that will be reported on Friday, and if you give weight to recent cheery numbers such as the uptick in regional indices of economic activity, you will stop worrying about the possibility of a renewed collapse in the jobs market.
If you read the recent upsurge in consumer confidence and spending to be suggesting that the demand side of the economy is ready to contribute to a more rapid recovery, you will murmur a word of thanks to the sainted John Maynard Keynes, and face 2012 with equanimity.
If you think that the combination of increased home sales and housing starts, and record low interest rates means that the housing market has bottomed out, as investors who have driven up builders’ share prices believe, you will contact your favorite real estate broker to inquire about a new, bigger home, or move out of your parents’ home and into your own starter property.
If you think that the presidential and congressional elections will end the stalemate that has seen U.S. debt soar to levels that have the rating agencies on edge, you will have renewed faith in the democratic process. A reelected, newly conciliatory Barack Obama will find the political center attractive, and Republicans in Congress will abandon their defense of “the rich” from the higher taxes the Democrats want to impose. The White House version of tea and sandwiches will produce a new harmony and compromises acceptable to the president’s trade union supporters and the Tea Party. If you believe all of this, you should be looking forward to a better 2012, which is what a recent poll shows is the expectation of 62 percent of Americans, and an even better 2013.
Alas, there is another set of “ifs” to consider. If the eurozone problem remains unresolved, as it might, Europe’s banks will totter and perhaps trigger a global cash crunch. After all, even after the ECB’s buying binge Italy still finds itself paying close to 7 percent for loans. A major European recession would follow. If you believe demand for China’s exports will continue to weaken, and that its banks can’t off-load some $2 trillion in bad loans, then you believe that China’s demand for commodities and Western products also will weaken, removing that source of strength from the world economy.
If you believe that the continued fall in house prices—down in October for the 13th consecutive year-over-year decline—is more significant a harbinger than the recent modest pickup in sales, you also believe experts who guess that the bottom of the housing market will not be reached until 2015. That bodes ill for the jobs market: The Federal Reserve Board’s economists expect the unemployment rate to stay at around its current level of 8.6 percent, which means that 24 million Americans will be out of work, looking for full-time employment, or too discouraged to bother hunting for a job.
If you believe that the recent spurt in consumer spending will prove unsustainable because it has come at the expense of savings—the savings rate has dropped from around 5 percent to a mere 3.5 percent—you believe the demand side of the economy will remain too weak to sustain the fourth quarter 2011 growth rate of between 3.5 percent and 4 percent.
If you believe that the new round of regulations being readied by the Obama administration for the new year will frighten businesses, especially job-creating small businesses, you also believe that business investment is unlikely to provide much of a boost to the economy. Onerous new reporting requirements, covering everything from the value of minerals purchased from the Congo to the value of employee health care plans are on tap. As are regulations still being drafted to implement new statutory regulation of financial institutions, and impose new environmental clean-up costs on utilities and manufacturers.
If you believe that the fiscal follies in Washington will lead to a further downgrade of U.S. debt, and a possible rise in interest costs, you worry that such a move will convert fragile growth into a double-dip. Or that deficits will continue to mount, the Fed will print money to pay America’s debt, and Jimmy Carter-style double-digit inflation will again wipe out savings and distort investment patterns. Stagnation or inflation or both—stagflation.
To each his own set of “ifs.” My own view might well be excessively colored by being in Washington, where rancor and recrimination substitute for reasoned debate, where the president has become a general in the new class war, and the Republicans refuse to recognize the need to reform market capitalism, where politicians seem intent on adopting the fiscal policy of southern Europe. So I incline to short term gloom, although I will not be surprised if the consensus forecast of 1.5 percent - 2 percent growth in 2012 is exceeded a bit—a continuation of the jobless recovery.
But longer term the outlook brightens. America is still the world’s largest source of major innovations. It remains the home of risk-taking venture capitalists, deep and liquid securities markets, and a labor market so flexible that thousands can flee, and indeed are fleeing high-tax, regulation-heavy, union-ridden California for booming Texas. It is a safe haven for investors and the country of choice by immigrants. And so it will remain.
Whatever your “if,” I wish you a happy, or at least not an unhappy, new year.
