Will it be a “double-dip” recession or 3-percent rise in GDP? That old adage that says, “Ask two economists their opinion and you’ll get three answers,” certainly seems to be holding true as just about everyone lately tries to figure out how well (or poorly) the US economy will do in 2012.
According to Grant Thornton LLP’s most recent Business Optimism Index, US manufacturing leaders are extremely pessimistic, if anything, about the US economy. The quarterly survey of 374 senior executives in various industries reveals that only 13 percent believe the US economy will improve in the next six months (Sept. 2011-March 2012). This is down significantly from 40 percent in the spring survey. At the same time, four out of 10 believe the US economy will get worse—up from 26 percent. In addition, only 21 percent of manufacturers say they will increase hiring, and more than one-third say they plan layoffs.
“Manufacturing has been one of the few bright spots in the economy since the end of the recession, generating more than 300,000 new jobs since December 2009, according to the National Association of Manufacturers,” says Wally Gruenes, Manufacturing Practice Leader at Grant Thornton and a member of NAM’s Board of Directors. “Strong export growth in 2010 and the first half of 2011 helped increase revenues and create jobs. However, the slowing global economy coupled with a lack of confidence in domestic and global economic policy has caused senior manufacturing executives to turn cautious as these are matters over which they have very little direct control.”
US manufacturers say they are focused instead on matters that they can control. Their top three priorities, says Gruenes: 1) reducing costs by improving manufacturing processes using techniques such as Lean Manufacturing and Six Sigma; 2) upgrading production equipment and IT systems to enhance efficiency; and 3) re-enforcing quality and customer satisfaction.
So, what else might contribute to growth for the remainder of 2011 and into next year? Some insight can be found in “The Outlook for the US Economy” from Goldman Sachs Asset Management (GSAM). It appears to come down to US household debt, recovery in housing and autos, and control of inflation.
The share of US household debt is easing, and while it remains very high (115 percent of disposable income), it has begun to decrease. Debt service, or the income spent on interest and principal payments, has declined more sharply due to the drop in interest rates. Today’s levels resemble the late 1980s and 1990s, and while the debt burden will remain for some time, it’s not as extreme as it was heading into the financial crisis a few years ago, GSAM says.
While cyclical parts of the US economy remain depressed, there will be a modest recovery in the housing and auto sectors in 2012. Housing starts are only marginally above 500,000 per year, which is less than half the long-term demographic rate of demand for new housing units. At some point in the next few years as the country works through excess supply, a meaningful pickup in housing activity is assured, GSAM says. Vehicle sales have also recovered somewhat, but are still below the levels reached 10 to 15 years before the financial crisis.
Taming Inflation Monster
Commodity prices soared in late 2010 and early 2011, but they’ve declined recently on global growth worries. Core inflation (excluding food and energy prices) appears to have bottomed out in contracts and has actually accelerated over the past year. Most core-inflation measures are now just below the Fed’s implicit inflation target of around 2 percent, and GSAM says core inflation will remain very benign. This is particularly important because it is a key metric used to gauge inflationary pressure in the future.
In addition, because of high levels of unemployment, high housing vacancies and considerable excess capacity in manufacturing, capacity overall is much tighter. In the economy as a whole, and within wage and service sectors in particular, this should translate into meaningful downward pressure on inflation—another important reason why a pick up in inflation is not expected in 2012.
How might the unemployment rate fare? The Federal Reserve is struggling to meet its dual mandate, with unemployment at 9.1 percent, projected to remain above 7 percent by the end of 2013 by its own forecast. Given such high rates, the Fed has reason to keep interest rates very low. Inflation is slightly below the Fed’s target of keeping stable prices just below 2 percent, GSAM says, and its forecast suggests that it will continue to remain below this target for the next few years.
My Thoughts: It seems as if an optimistic forecast for 2012 is better than “six of one, half a dozen of another.” The keys will be cutting US household debt (it’s being done), taming inflation (it’s looking likely) and putting people back to work (easier said than done). A big driver behind all of this is, of course, avoiding the self-fulfilling prophecy of the dreaded “Double-Dip Recession.” I promise NOT to use that phrase again.