Sunday, December 4, 2011

5 Reasons the Economy Will Be Better in 2012

2011 has been a rough year, but economists think next year will be better

The past year has been full of ups and downs—mostly downs—with the nation bracing for the worst with each jobs report, each GDP release, while also yearning to see a glimmer of improvement in the flat-lining U.S. economy.

Unfortunately, more often than not that hope has been dashed, but recently there seems to be a light at the end of the tunnel. Unemployment fell slightly, to 9 percent, last month and new unemployment insurance claims fell to their lowest level since April 2 as well. Housing, too, has seen some life breathed into it. Existing home sales saw a bump in Octoberand inventories across the nation are beginning to dwindle. While there's still a long way to go and a lot of inventory to work through, key indicators are finally moving in the right direction, economists say.

[See a slideshow on 10 turnaround housing markets.]

The million-dollar question remains whether these improvements can be sustained. According to most economists, the outlook for the U.S. economy is a mixed bag, but there are some definite bright spots. Here are five reasons the economy could look slightly better in 2012:

Moderate economic growth. Economic activity in the United States has gone from the miserable lows of just 0.4 percent growth in the first quarter of 2011 to a solid—relatively speaking—2.5 percent growth rate in the third quarter. Economists expect that pace to continue in the fourth quarter and drop off only slightly in the New Year to 2.4 percent. In 2012, economists expect stronger growth in the second half of the year as Washington (hopefully) provides some clarity on economic policy, according to the National Association of Business Economists.

To be sure, 2.4 percent is nothing to cheer about—economists generally say growth upwards of 3 percent indicates a healthy economy—and there are plenty of challenges ahead for the United States both domestic and abroad that threaten to prevent the economy from gaining further steam. Poor consumer and business confidence and a tepid housing market remain huge albatrosses hanging around the neck of the U.S. economy.

Still, moderate growth is better than no growth, and heartening for a nation saddled with huge public debt, an anemic job and housing market, and partisan antics in Washington.

No second recession. Along with moderate projections for growth, the odds of the United States entering another recession are low. That's a huge turnaround from earlier this year, when some economists were almost certain the United States was heading into recession or was already in one.

[Read about whether improving GDP figures will quell recession fears.]

"Economists responding to the latest NABE Outlook Survey expect moderate economic growth through 2012, with little likelihood of another recession or an outbreak of inflation," Shawn DuBravac, NABE outlook survey chair and chief economist at the Consumer Electronics Association, said in a report released today. "Despite a relatively subdued outlook, the panel estimates that the odds of a second recession remain low."

The report noted the panel's ongoing concern about debt-related issues in Europe, but emphasized that recession was among the least-likely scenarios. So while next year's economy probably won't turn up roses, it probably won't fall into a sinkhole either.

More business spending. One of the major paradoxes over the past several years is how well many businesses are doing in stark contrast to the ugly overall picture of the U.S. economy. In general, companies are flush with cash, and experts predict that profits and stock prices will continue to strengthen.

According to the NABE survey, corporate profits are expected to jump 7 percent in 2011 and 6 percent in 2012. Even with the intense volatility financial markets have seen over the past year, experts expect major indices to continue gaining ground overall through December 2012.

Due to uncertainty about the economy, many businesses put off investing in infrastructure or upgrading technology. That demand may now return, providing significant support for the ongoing economic recovery, experts say.

[Read: Is the Rising Star of U.S. Manufacturing Fading?]

Improving employment outlook. After remaining virtually frozen for several months, the unemployment rate is inching downward, with the latest outlook for the jobs market buoyed by better-than-expected unemployment insurance claims numbers. Fewer people are seeking unemployment benefits, which could translate into a lower unemployment rate come December.

NABE economists expect unemployment to dip below the 9 percent mark to 8.7 percent, a drop that could spark a renewed sense of confidence in the economy. Jobs gains should increase steadily over the next several months, from 100,000 jobs created on average in the fourth quarter of 2011 to around 130,000 by the end of 2012. Nevertheless, economists still cite unemployment as a major concern for the economy going forward, especially if the rosier predictions don't pan out.

Housing starts increase. Although 2011 is shaping up to be the worst year on record for the single-family housing market,the multi-family market, which makes up about one third of the housing market stock, is slowly coming back to life. That could be the prelude to a broader housing market recovery if economists' predictions are right.

Most economists don't see the housing market really gaining steam until 2013, but 2012 will build the fundamentals needed for recovery in 2013. "We see the housing market improving slowly going forward, with single- and multi-family housing starts, new home sales, and existing homes sales all higher in 2012 than in 2011," Patrick Newport, IHS Global Insight U.S. economist, wrote in a recent report, adding that prices will likely hit bottom in 2012.

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