The good news is the U.S. economy has picked up steam in recent months. After growing at an annualized rate of just 0.4 percent in the first quarter, we expect the pace to accelerate to roughly 3 percent this quarter.
What’s changed?
To start, consumers have opened their wallets. Cars and light trucks sold at a yearly rate of 13.6 million units in November, the highest level in more than two years. Businesses also have played a role, deploying a bit of their $2.1 trillion in cash to enhance productivity. Business investment in equipment and software grew at an annualized rate of 16 percent last quarter.
With this backdrop, one might expect bright prospects for 2012. Well, it won’t be easy. The economy has shown a tendency to change speed quickly. As growth accelerates, the prices of oil, gasoline and other commodities tend to rise, which restrains economic activity. As growth slows, commodity prices retreat, clearing the path for faster future growth. We expect this choppy growth pattern to continue. To be clear: The recovery is fragile.
The housing market is limping into the New Year again. Low long-term interest rates have led to some improvement in mortgage activity, but we expect continued weakness due to tight credit standards, soft prices and an inventory overhang from foreclosed properties.
Historically, worker mobility has been a hallmark of the American economy, but with so many mortgages under water, the ability of individuals to move in search of better jobs is restricted. One of the paradoxes of this recovery is that we have both high unemployment and a large number of job openings.
Businesses are having a hard time finding workers qualified for the type of jobs they have available. At the same time, individuals and corporations continue to reduce their debt levels, efforts that should be healthy in the long run but undermine near-term growth.
As 2012 approaches, we see other speed bumps. For one, the aforementioned upturn in consumer spending has been financed by dips into savings, an unsustainable tactic. Tax incentives are due to end.
Europe seems poised for a recession and some say it is in one. European weakness is a drag on businesses that export to the region. While this will dampen U.S. growth, we do not expect a new recession. Instead, we expect the modest expansion to grind on.
In 2012, politics will continue to heavily influence the financial markets. Two trends appear clear. The pendulum is swinging toward the right, and there is deep dissatisfaction with the status quo. At this point, one can only speculate on the elections and the extent of change in Washington. We would expect more to get done in Washington, D.C., if one party controlled the legislative and executive branches. European politics may prove even more important next year. While a systemic failure of the Eurozone — an outcome we don’t expect — could have a profoundly negative impact on the U.S. economy, an effective fiscal union on the continent could make investors merry indeed.
Rex Macey is the chief investment officer for Wilmington Trust.
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