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Sunday, December 18, 2011

Ten Economic Questions for 2012

by Calculated Risk on 12/18/2011 02:01:00 PM

Last year I listed Ten Economic Questions for 2011. These are still important questions for 2012, so once again I'll try to add some thoughts on these questions - and a few predictions - before the end of year.

1) House Prices: How much further will house prices fall on the national repeat sales indexes (Case-Shiller, CoreLogic)?

2) Residential Investment: Residential investment (RI) made a modest positive contribution to GDP growth in 2011, the first positive contribution since 2005. RI is mostly investment in new single family structures, multifamily structures, home improvement and commissions on existing home sales. Historically RI has been the best leading indicator for the economy, but the growth in RI will probably be modest again in 2012. How much will RI increase in 2012?

3) Distressed house sales: Foreclosure activity is still very high, although activity slowed in 2011 because of "foreclosure gate" issues. The number of REOs (Real Estate Owned by lenders) also declined in 2011. Will foreclosure activity pick up in 2012?

4) Economic growth: It appeared GDP growth would increase a little in 2011, but then the economy was hit by a series of shocks including extreme weather (significant snow storms, flooding, hurricane Irene), the oil price increase related to the "Arab Spring", the tsunami in Japan, and the debt ceiling debate in D.C. during late July and early August. Even with all these shocks, 2011 real GDP growth was still positive, but below trend.

Heading into 2012 there are significant downside risks from the European financial crisis and from U.S. fiscal tightening. Will the U.S. economy grow in 2012? Or will there be another recession?

5) Employment: The U.S. economy added about 132 thousands payroll jobs per month in 2011 through November (156 thousand private sector). Although this was an improvement from 2010, this was still weak payroll growth for a recovery. How many payroll jobs will be added in 2012?

6) Unemployment Rate: The unemployment rate is still elevated at 8.6% in November. Last year, my prediction was for the unemployment rate to still be above 9% in December 2011. I thought the participation rate would increase a little in 2011 - however the participation rate continued to decline - and that pushed down the unemployment rate.

I still think we will see some bounce back in the participation rate - and that will put upward pressure on the unemployment rate. What will the unemployment rate be in December 2012?

7) State and Local Governments: It is starting to look like there will be less drag in 2012 than in 2011. How much of a drag will state and local budget problems have on economic growth and employment?

8) Europe and the Euro: What will happen in Europe in 2012? How much of a drag will the problems in Europe have on U.S. growth?

9) Inflation: Will the inflation rate rise or fall in 2012?

10) Monetary Policy: Will the Fed introduce QE3? Will the Fed change their communication strategy and include the likely future path of the Fed Funds rate?

Summary for Week ending Dec 16th
Schedule for Week of Dec 18th