Believers in the business cycle should opt for modest optimism for the U.S. economy in 2012.
As I pointed a year ago, the average expansion phase of a business cycle since 1945 is 59 months. We are now just halfway - 30 months - along that path, and nearly all the key indicators remain favorable, although not buoyant.
The economy in 2011 grew at about 2%, less than my cheery forecast of 3.5%, but enough to silence the "double dip" recession fears of some. Signs of encouragement include:
- In the past 12 months, the number of unemployed has dropped by 1.3 million. Employment has being rising steadily, although is still down substantially from the cyclical peak.
- Industrial production is up 3.7% through November.
- U.S.-assembled auto sales in December were 11% ahead of a year ago.
The private sector's weak spots continue to be employment in financial services (particularly investment banking and related activities) and residential construction, whose sweetheart bubble burst in 2008. Contrast the flat employment picture in these sectors with the overall economy, as charted below using BLS data.
TOTAL EMPLOYMENT, 2001-2011
EMPLOYMENT - CONSTRUCTION OF BUILDINGS, 2001-2011
EMPLOYMENT - SECURITIES, COMMODITIES, INVESTMENTS
2001-2011
As a long-time believer in the powerful dynamics of the business cycle, I would normally be comfortable in suggesting economic growth in the U.S. next year should be on the order of 3.5% or better. This would be achieveable even with continuing sluggishness in single-family home building and important financial subsectors.
Consumer spending is clearly strengthening and capital spending budgets appear to be buoyant. The latter is due partly to the spreading impact of gas and oil shale drilling, development, and pipeline activity on both suppliers and customers (e.g. utilities and chemical manufacturers in several regions of the country.
However, the outcomes of the European Euro-debt crisis and political gridlock in the U.S. over taking steps to avoid precipitating a similar situation on this side of the Atlantic are truly exceptionally bothersome uncertainties.
The pessimist will side with Kenneth Rogoff, the leading historian of such events, who has written recently about "the likely coming wave of sovereign defaults." The optimist will concede that Greek bondholders will shortly take a bath, but that the resulting waves will be insufficient to overturn the boat.
Bottom line? A growth rate of 3.5% for the U.S. in 2012 is my "most likely" possibility, but the downside odds are larger than usual.
