2012 Economic Scorecard: The Case for Hope, Despair, and Utter Confusion

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 ...

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... 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.

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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.

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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.
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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.

Spending: What's the best way to predict a spending comeback? Maybe it's the savings rate, or revolving credit, or total bank credit. But spenders are people, not numbers, and people are moved by psychology as much as by math. So check out this graph of expected change in family income over time. What you're seeing is the bottoming out of American optimism, which is an under-reported aspect of our slow spending recovery in the middle class.


And here's more pessimism from today's New York Times report on the post-holiday hangover of the U.S. consumer:

Credit card delinquencies increased for the first time in almost two years in the third quarter, according to credit bureau TransUnion, though the delinquency rates are still very low. And mortgage delinquencies were about 6 percent at the end of 2011, down a little from a year ago but higher than earlier last year, compared with the prerecession rate of 1.5 to 2 percent.

Though shopping has remained relatively strong, the level of consumer debt in October was at its highest in two years, meaning people are buying on credit rather than with income. And the savings rate in November was 3.5 percent, the lowest since 2007, which suggests shoppers are also buying with savings.

Abroad: It's like I said. Europe is set to collapse. China's deterioration could turn critical. Indian inflation could rise, and its exports could slow, since so many of them go to China and Europe, in the first place. All those things don't have to happen together. Any one could set off a chain of events that hurts the U.S. economy. And if China and India and Europe surprise with strong growth, guess what? Oil prices will probably rise, causing a demand shock for suburban families and businesses.


A bit of Socratic humility is useful when we talk about the economy: We know nothing. Twelve months ago, economic forecasters were fairly certain that the U.S. was about to explode for a monster 2011. Goldman Sachs predicted that it would be the Year of America. We know how that ended. A gas spike shocked demand in the first quarter. Congress flirted with default over the summer. Economic growth was either subpar, if you go by GDP, or nearly negative, if you go by GDI. The stock market was as flat as its been in decades.

My favorite economic indicator from 2011 is the Citi Surprise Index, which tracks how wrong economic forecasters have been over time. A reading of zero indicates a perfect economic forecast. A high number reflects a stronger-than-expected economy, and a negative number reflects overly optimistic economists. Predictions are fun. But boy are they wrong, just about always.

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