A year ago, I gave my 2011 review and 2012 predictions (after leaving my tryptophan induced coma, remember?) http://fit-biz4u.com/blog/2011/12/27/joes-economic-predictions/. Now it’s time to see how I did.
Last year, I estimated that 2012 GDP would grow by an enemic 2.5%, that unemployment would drop from 8.6% to 8.2%, that housing would remain stuck until 2013 and so would business lending. Also that Europe would struggle and the political season wouldn’t help, but shouldn’t hurt. In fact I was both right and wrong on so many levels.
Let’s start with GDP. While all of 2012 numbers are not in, GDP appears to have come in at a paltry 1.9%. Third quarter came in at 3%, but Q1 and Q2 were 1.3% and 1.4% respectively. It appears that Q4 will come in at 1.9% which is pretty bad given that Q4 in 2011 came in at more than double that amount.
Jobs. So here is the upside surprise. At the end of 2011, the unemployment rate was 8.6%. However, as of November the unemployment rate had fallen to 7.7%. That was better than most people predicted a year ago, but because most of that drop happened in the second quarter, it doesn’t feel all that great.
Business lending. This one feels like Groundhog Day, although it is also better than it feels. Business lending grew tepidly throughout the year and then pulled back near the end. This was due to a variety of factors, but Europe, fiscal cliff and political stalement were largely to blame. Defaults and delinquencies have stablized over the last two years. Low rates are actually a problem, because it means for lenders there is little profit so there is little appetite for risk and still only the best business credits are getting loans.
There has been some loosening for less than “A” credits, but the pricing for those products is still excessive and credit restrictions are still too difficult.
Housing. A year ago, I thought this was the most troubling weight on the US economy. That is no longer the case. Housing has begun to right itself. The areas of the country where housing had not been such a problem are doing quite well. Even areas that had huge gluts of unsold homes have largely sold off that inventory and new building and new growth was starting. Home prices are still at low levels, but we expect those to start to grow along with the rest of the economy.
Corporate interests. Large US companies are doing extremely well. In the third quarter of 2012, corporations reach all time record profits http://money.cnn.com/2012/12/03/news/economy/record-corporate-profits/index.html. Additionally, US companies could be sitting on as much as 5 trillion dollars in cash, both US and internationally http://blogs.reuters.com/david-cay-johnston/2012/07/16/idle-corporate-cash-piles-up/. Companies will start to invest this cash in plant, workers and wage increases when they become convinced that doing so will generate more profits than letting that cash sit on the sidelines.
Europe. Talk about Groundhog Day. A year ago, we were talking about how bad Greece is and what will happen with Spain, Portugal, etc. Today it is exactly the same. Germany is supporting the ”PIIGS” (Portugal, Ireland, Italy, Greece and Spain – especially Greece), and France’s economy has serious issues that haven’t come to fruition but might soon. Europe is dancing a line between funding countries so they don’t collapse and imposing fiscal restraint that will guarantee those countries do collapse. Seems to me that the only cure is for other economies (US and the BRIC’s) to pull Europe out of recession by increased spending. But that won’t happen anytime soon.
China and others. So this was an unwelcome surprise for the international economic community. China is not immune to reality after all. China’s announced growth of 8% is enormous by US standards (400% higher than ours), however, it’s a 50% drop from their 12% growth. China is also having to deal with an aging population that is demanding higher and better support in their declining years. This same thing is happening in India as well (without the aging issues). China will continue to be a dominate player, but fears of an imminent new world order are overblown.
US Politics. A year ago, I said the following “While I don’t think that the political system will do much to further hurt the US economy, a government shutdown or default on paying its obligations would be a problem.“ The reality may have actually been worse. With both Democrats and Republicans insisting on “my way or the highway”; fiscal cliff, debt ceiling and other debacles continue to tell businesses large and small and foriegn and domestic, that the US political class is not interested in US economic recovery, they are interested in playing to their power bases. In this writer’s opinion, this is the number one drag on the US economy. If the US showed strong leadership by putting aside partisan posturing and crafting sound economic policies that included pain for all constituents, this would give businesses both in the US and abroad the courage to invest. This however, would require leadership and political courage to oppose the interests that helped put them in office.
Summary and predictions. I said that in 2012 we would have 2.5% GDP and 8.2% unemployment. In fact GDP was only 1.9% but unemployment dropped to 7.7%. Housing is getting better quicker than expected but Europe is worse and the US political equation continues to lurch from manufactured crisis to crisis with no end in sight.
So here are my 2013 predictions. I’m an optimist. I believe that within the first quarter the politicians will get their act together, and resolve taxes & spending in a manner that will in general last for the remainder of President Obama’s term. This will lead to greater business confidence both here and abroad and the US will get it’s triple A credit rating back by the end of the year (but not before).
The result will be a US economy that grows GDP by 2.7% and unemployment will drop to 7.2% in 2013. Interest rates will begin to rise, but that will spur lending because margins are better for banks and businesses will be ready to borrow to lock in rates before they increase. Housing will gain in importance and begin picking up steam by the end of the year. US growth will help provide leadership to Europe, which will begin to correct, but about 6-9 months behind the US. The growth in the US and later the EU will help with China and the rest of Asia.
So those are my thoughts. What are yours?