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Morici: Economic Outlook for 2012

The economy is expected to register 3 percent growth or better for the 4th quarter, thanks to stronger consumer spending; however, the growth in consumption has been outpacing income, debt is piling up again, and some pull back in consumer activity is likely the first half of 2012.

Unlike the boom years of the last decade, households will not be able to refinance credit card debt and auto loans by further mortgaging homes, and consumers simply must slow down during the first half of 2012.

The economy will register growth at or below 2 percent the first half of 2012, perhaps picking up the second half of the year to 2.2 to 2.5 percent.

Here are my forecasts.

Quarterly Forecasts (percent)

Q411
Q112
Q212
Q312
Q412
2011
2012
2013
GDP: Annual 3.0 1.8 1.8 2.2 2.2 1.8 2.1 2.0
GDP: Q4/Q4 1.7 2.0 2.0
CPI: Y/Y 3.4 2.7 2.3 2.2 2.5 3.2 2.4 2.6
Core CPI: Y/Y 2.1 2.2 2.0 1.8 1.8 1.7 1.9 1.8
Unemployment 8.7 8.8 8.9 9.0 9.1 9.0 9.0 9.2
Federal Funds 0.125 0.125 0.125 0.125 0.125 0.125 0.125 0.125

Bright spots include continuing strength in autos and a modest recovery in residential construction—already underway—but risks that existing home prices may fall further and the difficulties of reselling homes in most markets are pushing young families into renting.

In addition, the greater concentration of deposits among large Wall Street banks—thanks to industry consolidation prompted by Dodd-Frank—makes financing more easily available for multiunit developments, as compared to single units, than in the past.

Consequently, more young families will be renting than during the last decade, and more of the recovery in residential construction will be concentrated in that sector than in past recoveries.

Industrial production and manufacturing will continue to expand but jobs creation in those sectors continues slow. Simply, the failure to address currency issues with China and others, and rising protectionism in China, Brazil and others in their orbits make manufacturing using significant amounts of labor tough in the United States. Most of the gains will be in resource related sectors—e.g., oil and gas equipment—and high-tech and other durables, using minimal production labor.

Risks to Recovery

Most risks are to the downside, and adverse events in any one of four areas could instigate a recession.

1. China faces real challenges--falling property, questionable accounting standards and banks stuffed with bad loans. Once again, China is turning to protectionism—increasing tariffs and further suppressing the value of its currency to keep out U.S. exports. The Administration has shown little inclination to confront these aggressive practices with substantive U.S. responses, and the Congress cannot act in a timely fashion without presidential leadership. Moreover, House Speaker Boehner appears to share President Obama’s predispositions on trade issues with China making unlikely any action until after the fall elections, if then.

2. U.S. banks remain troubled and are not lending money to small and medium sized businesses. After buying up smaller banks that can't cope with new, tougher regulations, Wall Street banks control more than 60 percent of deposits nationally, and are driving down CD rates (essentially exploiting monopoly positions as they acquire banks in regional markets), and are not making enough loans to Main Street businesses.

Instead, Wall Street banks are using deposits to engage in other, non-traditional-banking activities that don't move the economy forward. Gaming at the Wall Street casino tables pays the big bonuses, while the old fashioned business of making loans from government insured deposits does not.

3. Oil prices are spiking, and the Obama Administration continues to stall, slow and stop U.S. oil and gas projects at every turn. That affects the economy much like a negative stimulus package--petroleum projects use the same kinds of stuff (steel, cement, construction workers) as building roads and buildings.

4. Europe is in deep trouble. The crisis has not passed and if the right steps are not taken, European banks, which are burdened with a lot of Italian, Greek, Spanish and other government debt, will start failing. U.S. banks are vulnerable to a contagion.

European economic powers—in particular, Germany and France—appear wholly disinclined toward forging a genuine fiscal union—continental taxation to finance essential functions of government. Limits on national deficits are no substitute for common taxation and unified spending policies, and instead such austerity almost guarantees a prolonged European recession and price deflation. A process that could take until the end of the decade to complete.

Peter Morici is a professor at the Smith School of Business, University of Maryland, and former Chief Economist at the U.S. International Trade Commission.

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