U.S. Economic Update, January 2012

 2012: A Pivotal Year

  • 2012 will prove to be a pivotal year for the U.S. economy. Much will be decided in 2012 and much will change. Regardless of which way the winds of change blow, the end of the year will feel very different from the beginning of the year. In 2012, the U.S. will be preoccupied by a presidential election and emerge from the election process late in the year with both a plan and a mandate for fiscal reform. Defense spending will begin to wind down from the Iraq/Afghanistan buildup.  The unemployment rate will make steadier downward progress, not entirely for good reasons, as thousands drop out of the labor force. The Eurozone will either continue to muddle through its crisis or radically reconfigure itself. China will either have engineered a “soft landing,” cooling its real GDP growth down to seven-to-eight percent, or feel a harder and bumpier landing if it over does it, and cools to a “growth recession” of five-to-six percent real GDP growth. Oil prices are sitting on a bubble. Ample global hydrocarbon supply and the likelihood of weaker global demand suggest that oil prices should decline. However, saber rattling between Iran and the U.S. foreshadows the possibility of higher oil prices. 
  • Early in the year, the distribution of economic risk will have “fat tails.” Both upside and downside risks may exert strong leverage on the economy. However, the Eurozone crisis swings the overall balance of risk to the negative  for early 2012. Economic growth will feel choppy and financial markets will continue to feel volatile. Later in the year the tails of the risk distribution thin out; it starts to feel like a more “normal” economy heading into 2013. The unemployment rate will have fallen below 8 percent by late 2012. House prices will have begun to feel more stable in most parts of the country. The trailing sectors of the U.S. economy, housing and labor, largely not participating in the economic expansion through 2011,  will show more improvement. Consumers, still not able to lead economic growth, will at least begin to feel more secure in satisfying pent up demand for autos and for housing.
  • Payroll employment increased by 200,000 in December, continuing the trend of better than expected fourth quarter 2011 data. Private sector job gains in December were broad-based and weighed down by ongoing losses in government employment.  December’s official payroll job gain of 200,000 is broadly 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. 

Click here for the complete January 2012 Comerica U.S. Economic Update, including charts, commentary and an updated forecast worksheet: USEconomicUpdate0112

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