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Sunday, January 08, 2012

Question #4 for 2012: U.S. Economic Growth

by Calculated Risk on 1/08/2012 06:36:00 PM

Earlier I posted some questions for next year: Ten Economic Questions for 2012. I'm trying to add some thoughts, and a few predictions for each question.

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?

First a look back. Heading into both 2010 and 2011 there were a number of forecasts for a "V-shaped" or strong recovery (4% to 6% real GDP growth range), and also a number of forecasts for a new recession. Both views were wrong for both years.

I took the boring middle ground in 2010 and 2011: sluggish and choppy growth, but no new recession. And once again - for 2012 - I'll take sluggish growth with no recession. There are still plenty of scars from the financial crisis (excessive debt, high unemployment, excess capacity, excess supply of housing, a large number of homeowners with negative equity, and high foreclosure activity), but the economy appears to be slowly healing.

Based on recent data there have been some upgrades to the 2012 forecasts. As an example, from Goldman Sachs on Friday:

In light of better recent data and the renewal (at least through February) of the payroll tax credit and emergency unemployment benefits, we upgraded our first-quarter forecast for real GDP growth to 2% [from 0.5%].
Not much, but still growth.

As predicted, residential investment (RI) made a small positive contribution to GDP growth in 2011 for the first time since 2005. This was mostly due to a significant pickup in multifamily starts and partially due to an increase in home improvement. This trend should continue into 2012, and we will probably see some increase in single family investment this year too. Since RI is the best leading indicator for the economy (although not infallible) this also suggests further growth in 2012.

There are still plenty of downside risks: financial contagion from Europe, the slowdown in China, and falling house prices all could lead to slower U.S. growth. However my guess is growth will be sluggish relative to the slack in the system, but above the 2011 growth rate.

Question #5 for 2012: Employment
Question #6 for 2012: Unemployment Rate
Question #7 for 2012: State and Local Governments
Question #8 for 2012: Europe and the Euro
Question #9 for 2012: Inflation
Question #10 for 2012: Monetary Policy

Summary for Week Ending January 6th
Schedule for Week of Jan 8th