U.S. Economy Proves its Resilience, Moderate Growth Expected in 2012

As 2012 begins, the U.S. economy is accelerating. According to the Bureau of Labor Statistics, real gross domestic product expanded at a 2% annualized rate in the third quarter, following a meager 1.3% in the second and just 0.4% in the first. Labor conditions also have improved significantly since the first half of the year.

In November, the nation added 120,000 jobs, following revised figures of 210,000 jobs in September and 100,000 in October. Moreover, initial unemployment claims recently fell to a three-year low, and the nation’s unemployment rate achieved a 32-month low.

But for the most part, 2011 was a disappointment because, entering the year, the economy was flush with momentum. It expanded 3% last year and many economists were predicting roughly 3% growth in 2011.

However, various factors transpired that stymied those estimates, including a surge in commodity prices, the March earthquake in Japan and the U.S. debt ceiling debacle. Now, that figure looks more like a rise of 1.6% to 1.7%.

Various Factors

Certain commodity prices have yet to fall significantly after surging in the beginning of 2011. For instance, prices for food items, such as fresh fruits and vegetables, were up 19.1% in November on a year-over-year basis, while prices of apparel and other textile products are up 4.5%.

Consumers have found some relief in falling gasoline prices, however, which have dropped every month since June (except for September). As of Dec. 12, the average price for regular gasoline nationwide is $3.29 per gallon, according to the U.S. Energy Information Administration.

The European debt crisis and ongoing gridlock in Congress continue to cause uncertainty across financial markets. Europe’s financial crisis, which most recently spread to Italy, has now pushed the continent into recession. While the recession may be mild, perhaps lasting only through mid-2012, the threat of a deeper downturn is daunting to investors and other stakeholders.

Fortunately, thus far the crisis overseas has produced a stronger U.S. dollar and lower interest rates, while leaving American economic momentum intact. However, Europe’s troubles could weaken global trade and impair the availability of credit, given the pressure on financial systems in the U.S. and abroad.

U.S. policymakers have a considerable amount of work to do. The most imminent issue pertains to the payroll tax cut and unemployment insurance benefits, both of which are set to expire at the end of 2011. The Tax Policy Center estimates that the payroll tax cut allowed 121 million Americans to keep roughly $934 in their paychecks (on average) this year.

Unemployment benefits were provided to almost 3.5 million unemployed Americans last year. Chief Economist Mark Zandi at Moody’s Economy.com estimates that the failure of U.S. lawmakers to act along various dimensions would shave roughly 1.7 percentage points from real GDP growth in 2012. The payroll tax cut and the emergency unemployment insurance program together are worth approximately a 0.9 percentage point of GDP next year.

Consumer Spending

Additionally, if one presumes that automatic federal spending cuts attributable to the failure of the so-called Super Committee are not undone or adjusted, a total of $1.2 trillion will be cut during the next decade from the federal budget, with cuts divided evenly between national defense and nondefense spending.

Through it all, however, the U.S. consumer has kept the economy afloat. The U.S. savings rate has been around 3.5%; as recently as June, the savings rate was 5% and a year earlier it was 5.3%. In other words, while consumers continue to indicate a lack of confidence, they continue to spend a higher fraction of their income; personal consumption was up 4.7% on a year-over-year basis in October following a 5.2% year-over-year increase in September.

But consumers won’t be able to sustain this level of spending unless personal income and wages expand more rapidly going forward, and that cannot happen unless job growth accelerates. That said, in recent months, job growth has been accelerating, according to both establishment and household surveys.

Looking Ahead

Prospects for 2012 have improved. An object in motion tends to stay in motion and the U.S. economy is now on the move. Though the recovery remains tentative and fragile, the momentum achieved since the end of the summer of 2011 should sustain the economy well into 2012.

Key to ongoing expansion will be a resolution to the sovereign debt crisis in Europe, the absence of financial market collapse and growth in key economic segments, such as energy, health care and a host of professional services.

While the U.S. economy’s performance this year was generally disappointing, Maryland’s performance has been even more so. During a recent 12-month period, Maryland’s pace of job growth was just one-third that of the nation’s. With the specter of federal government cutbacks in fiscal 2013 in front of us, Maryland’s outlook has arguably not been so shaky since the early ’90s.

The key to Maryland’s performance going forward will be to attract more private domestic and global investment to offset the presumed loss of federal government and contracting jobs.

Anirban Basu is chairman and CEO of Sage Policy Group in Baltimore. He can be reached at 410-522-7243 and abasu@sagepolicy.com.