Will the Economy Finally Recover in 2012?

NEW YORK (MainStreet) — In the first week of this year, President Obama expressed his optimism about recent job numbers and uttered four words that members of his administration had said with varying degrees of enthusiasm before: “Our economy is recovering.”

Americans had been told in 2009 that the economy would stop bleeding jobs and begin to improve if the Recovery Act was passed. The next year, they were told to expect a “recovery summer” from stimulus-funded projects that would create new job opportunities around the country. Instead, the summer of 2010 ended with the unemployment rate rising back above 9.5%. So by the time the president spoke those four words, he was sure to temper expectations by noting that “we’ve got a lot of work to do.” Unfortunately, even that may have been overly optimistic.

“The economy hasn’t felt like it’s been in recovery mode for much of the last year,” says Andrew Fieldhouse, a federal policy analyst with the Economic Policy Institute, a non-partisan think tank. That’s not to say the economy hasn’t improved, but rather that those improvements haven’t been robust or quick enough to be felt by the average household.

The country’s gross domestic product (GDP) grew by 1.8% in the third quarter of this year and by just 1.3% in the second quarter, whereas Fieldhouse says the GDP would need to grow by at least 2.5% to chip away at the unemployment rate. As a result, we saw the unemployment rate worsen in the middle of the year before it finally dropped to 8.6% in November, the first time it had fallen lower than 9% in more than six months. What’s more, Fieldhouse says that if we factored in the people who had stopped looking for work, the real unemployment rate would actually be closer to 11%.

Add stubbornly high foreclosure rates nationwide to the mix and it’s not hard to see why some might doubt the Obama administration’s previous assurances that the economy is improving. Some economists say there have been flickers of a more full-throated recovery in recent years, but inevitably each seems to peter out.

“We have gone through a couple of mini-cycles of that growth where everyone is hoping we’ve reached takeoff speed,” says Paul Ashworth, senior U.S. economist at Capital Economics, pointing to the last months of 2010 preceding Obama’s comments as one such example. “Then hopes are dashed.”

However tepid the recovery may have felt this year, 2012 won’t be much better.

The New Fiscal Landscape

Many of the same factors that muted the economic recovery in 2011 will continue to do so in the coming year, along with some new ones. These factors can effectively be divided into three categories: structural issues with the U.S. economy, counterproductive government policies and instability abroad.

For starters, Ashworth says many businesses remain apprehensive about investing in new workers and equipment at least due to a lack of confidence in the direction of the U.S. economy and concerns that the ongoing debt crisis in Europe could end up having a negative impact on global demand.  As is stands though, the labor market is in desperate need of aggressive new hiring. The Congressional Budget Office projects that the unemployment rate will likely stay above 8.5% throughout 2012.

“There is so much excess supply in the labor market that even workers who do have jobs can’t demand higher wages, and without income increases the consumer won’t be in a position to lead the way out of the downturn,” Fieldhouse says.