Will the Economy Finally Recover in 2012?

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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.

At the same time, legislators in Washington are increasingly focused on deficit reduction measures rather than stimulus options to boost the economy (opting not to vote in favor of the American Jobs Act earlier this year to provide another round of infrastructure spending and tax credits.) Meanwhile, banks remain fixated on shoring up their balance sheets rather than lending out money to small businesses and consumers.

The net effect is that there is no group actively leading the way out of the sluggish economy. Businesses refuse to hire, consumers refuse to spend and the government refuses to open its pockets to influence either of those outcomes.

To make matters worse, if Congress decides not to extend the payroll tax cut or unemployment benefits, it will further weaken the spending power of consumers and slow down the pace of the recovery even more. One Goldman Sachs forecaster predicts that a failure to extend the tax cut would cost the economy 400,000 jobs next year.

“We have been pushing back the headwind from the expiration of the Recovery Act with measures like the payroll tax cut, but that’s about to change,” Fieldhouse says. “You are not going to close the output gap and restore full employment without fiscal stimulus. Unless the government does more, the projection looks pretty bleak next year.“

Moody’s predicts that GDP growth will be 2.6% in 2012 while the National Association of Business Economists predicts it will be 2.4%, or slightly less than would be needed to bring down the unemployment rate.

The Silver Lining

For all the potential turbulence still to come, there are reasons to be optimistic about the state of the economy in 2012  (at least cautiously so).

The biggest source of hope comes, of all places, from state governments. While the federal government is strapped for cash, state and local governments saw their revenue increase by 4.1% in the third quarter of this year compared to the same period in 2010. Meanwhile, by law, 49 of the 50 states have run balanced budgets each year, meaning that there is beginning to be a surplus of money for state-level programs.

“Instead of cutting their workforces and reducing spending, they have now reached the point where they can undo some spending cuts and hire back some of those workers. That should add to GDP,” Ashworth says.

Housing, too, has shown signs of improvement recently. The number of housing starts hit an 18-month high last month and the Housing Market Index put out by the National Association of Home Builders hit its highest point in more than a year and a half. To be sure, the housing market remains dismal in the hardest hit portions of the country like Nevada and Florida, but in many other regions we are seeing it begin to approach some degree of normalcy, which Ashworth says is “encouraging.”

Finally, a small consolation for the year may come from what won’t happen. After heightened concerns this year that we would enter a double dip recession, more recent projections now say that this is unlikely in 2012. Moreover, the unemployment rate isn’t likely to go back up to double digits. Whether it increases at all, Fieldhouse says, is largely dependent on whether we see an influx of discouraged workers reentering the labor force to look for jobs.

That may not sound like much of a recovery, but barring any new catastrophic spending cuts or a global economic crisis, it will for the most part be a step in the right direction. A full economic recovery, Ashworth says, is most likely still a couple years away.

Seth Fiegerman is a staff reporter for MainStreet. You can reach him by email at Seth.Fiegerman@thestreet.com, or follow him on Twitter @sfiegerman.

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