The U.S. stock market woke up to a continental breakfast of strong economic reports this morning showing accelerating growth in U.S. manufacturing, a boomlet in construction spending, and Chinese manufacturing moving back into growth after a scary slip in November. Nobody has the faintest clue whether this news will keep up for 12 months, because experts are horrible prognosticators. But since everybody likes a good prediction, we wanted to create a scorecard to help you be, if not the world's best forecaster, at least one of the least bad guessers out there. Here is your case for optimism, pessimism, and utter uncertainty.
Homes: Any reasonable case for optimism has to address the housing bust, which is the leading factor behind the devastating drop in overall U.S. investment (see below). Without investment, there's precious hope for future growth ...
... but here's the case for hope: Housing starts just hit an 18-month high. Home prices have fallen as much as 60 percent in some parts of the Sun Belt, making them a relative steal for families that saved during the slog. Six or seven years after the housing bubble peaked, there is arguably a remarkable shortage of homes. Multifamily housing
starts are already up 80 percent over the past year, Matt Yglesias reports, and it could be the beginning of a real turnaround in housing.
Jobs: The unemployment rate is 8.6 percent, the lowest since the third month of President Obama's tenure. But the leading indicator to keep your eye on is initial unemployment insurance claims. The rule of thumb is that the labor market is seriously growing once that figure falls below 400,000 per month and stays there. Guess what? It's fallen under 400,000, and despite last week's rise, it looks like it's there to stay.
Spending: There are roughly three places spending can come from. First, it can come from government, which is not in a terrifically expansionary mood at the moment. Second, it can come from wages and salaries, which are set to rise if you believe that job growth will pick up through 2012. Third, it can come from credit. Why should we expect credit to grow in 2012? Consumers have been saving like mad since the recession hit (see below), and total bank credit is expanding. More jobs, higher wages, and more credit would make for a consumer-led recovery.
Abroad: There is a sense among some economists that 2012 is going to live up to its Mayan reputation. Europe is set to collapse. China's deterioration will turn critical. Indian inflation will rise, and its exports will slow, since so many of them go to China and Europe, in the first place. But what if the eschatologically dire pessimists are wrong? What if the ECB steps up to back EU debt, China stimulates its way through housing fears, India's export engine gets revving again, and the United States' biggest trading partners -- Mexico and Canada -- give a special lift to U.S. exports? It could happen!
Homes: Home prices still have another full year to fall, at least, before we hit the long term Shiller/CoreLogic slope. What's worse, those historical slopes reflect consumers who have been in better positions to buy homes than the U.S. middle class family, which has been battered with years of slow wage growth and household debt that totaled 125% of income in 2007. In December, we cheered the news that new home construction has reached April 2010 levels. But, um, do you remember April 2010? I do. It wasn't so great.
Jobs: Of course, falling initial claims are fabulous news. But here's the rub. Six million people have dropped out of the labor force since the recession. If we factor them into the unemployment rate, we're looking at a number more like 11% than 8.6%. Before the unemployment rate goes down, it's going to go up. More jobs are always good news, but not if they come at the price of rising unemployment that scares businesses about the economy's true health.