The news continues to be good for the domestic economy. 2011Q4 real GDP growth will be in the range of 3.5 percent. Momentum in the private sector at the end of 2011 will spill over into the current first quarter of 2012. U.S. job growth amid moderating inflation will add to real disposable income and allow for consumers to unleash some pent up demand. Increased hiring confidence, particularly among small businesses, is a plus going into 2012. The major uncertainty is the potential drag from recession and financial market crisis in Europe. It is too early to say that the U.S. economy is decoupled from the Euro-zone crisis. Later in 2012Q1 we will begin to feel some of the drag from a weakening Europe. Add to that increased drag from constrained federal and state/local government spending, and likely less robust business investment spending, and the first half of 2012 still looks risk prone for the U.S. economy, with real GDP growth in the range of 2.0 to 2.5 percent, uncomfortably close to stall speed. Payroll employment increased by 200,000 in December. Private sector job gains in December were broad-based. Government employment still declined but by a smaller amount, -12,000 for the month. December’s official payroll job gain of 200,000 was consistent with other labor market metrics such as the private ADP Employment Report, which posted an outsized gain of 325,000 jobs for December, and initial claims for unemployment insurance which have been consistently below 400,000 in recent weeks. The household survey of employment, which determines the unemployment rate, posted a gain of 176,000 jobs in December, bringing the unemployment rate down one-tenth to 8.5 percent. Also working to lower the unemployment rate was a 50,000 person decline in the civilian labor force. The ISM Manufacturing Index for December increased to a solid 53.9 percent as both the production and employment sub-indexes increased by 3.3 percent for the month. Exports were still growing through December, up 1.0 percent according to the ISM. Manufacturing remains the backbone of the U.S. economy. Healthy domestic private-sector demand for U.S. manufactured goods is expected and will be needed to overcome drags from abroad and from constrained U.S. government spending. The ISM Non-Manufacturing Report for December showed an increase in the business activity index to 52.6 percent from November’s 52.0. Anecdotal comments indicated improved business conditions through the fourth quarter. U.S. auto sales for December ticked down slightly to a 13.5 million unit pace. This is just below the 13.6 million unit pace of November and is a win for the automakers. Construction spending for November increased by 1.2 percent with gains in private residential construction activity. Slow-to-moderate gains in the pace of residential construction are expected through 2012. Multifamily construction is coming back from the dead as vacancy rates tighten up in many areas and rents increase. Single-family construction will improve more slowly, weighed down by the exceptional affordability of existing homes.
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