In December I offered my economic view of 2012. I thought this would be a good time to see how my prognostications were doing.
The short answer is not so good. Here is how it’s shaking out.
Economy. After last year’s not quite 2% growth, I thought we’d limp along at 2.5%. Instead we are crawling along at 1.9% – the same as last year. It felt bad last year and feels even worse so far.
Jobs. At the time the unemployment rate was 8.6% and I was cautiously optimistic that we would be at 8.2% by year end. Instead in January we dropped almost immediately to 8.3% and then stalled there. Today we’re at 8.2% but since we’ve been stuck at this level for 6 months it actually feels worse than if we had a gradual decline. I think by year end we may hit 8% – but lots of factors that have nothing to do with job creation will affect this number.
Housing. It’s like the movie Groundhog Day. Just keeps repeating. Housing starts looked like they were picking up, then in June new home sales dropped 8.4%. Zillow says that prices have bottomed and are starting to go up – but a .2% increase in the last 12 months doesn’t exactly seem like a barn-burner. Mortgage rates continue to hit unbelieveable lows (3.5%!!!) – but very few people qualify for them so it’s not moving the needle very much. I think we have another 12 months of anemic housing before we see anything resembling growth.
Europe. This is what’s really holding up the recovery. First up is Greece. The European powers know exactly what Greece needs, which is huge spending cuts and discipline. The Greeks however don’t agree. This is understandable since they already have a 25% unemployment rate and those spending cuts hurt real people (who vote and demonstrate). It is more and more likely that Greece will withdraw from the Euro, but the issues that creates are to convoluted to contemplate. Spain. The European Union, led by Germany’s Merkel, agreed to backstop Spain. But it appears that the funds provided won’t be close to what Spain needs. Spain is the fourth largest country by GDP in the EU (not including England which retained the pound) and having them collapse is unthinkable – but how do you stop Spain from collapsing? Finally there is Italy, also in serious straits. Italy is the third largest country in the EU – need I say more?
I’ll add China is starting to experience slower growth. Now their 8% to our 2% doesn’t seem like much slowing, but it is down by a third from 12% and it will be interesting to see what happens. If China catches a cold, what happens to the rest of the world?
US Politics. It is 103 days until the Presidential election. We are in midst of silly season. Nothing will get done. It appears as if the debt ceiling event that was going to come right around election time can be pushed in to early 2013 so it will be an issue for whomever is elected to deal with. The US still has it’s credit rating diminished but that hasn’t hurt it because it’s still viewed as a safer bet then bonds of other sovereign nations (think Spain, Greece, Italy, etc.).
A final related political note. Bankers have lobbied hard against banking regulations - but then continue to engage in activities that cause the public to think more regulations are needed. The LIBOR scandal in Britain is just getting started and all indications are that it will cross the pond to the US. How this will affect US banks is unclear but it won’t increase either US consumers or businesses access to capital.
Commercial financing. Unfortunately it has stalled out. Six months ago it appeared that lenders were loosening their credit restrictions and that borrowing would increase. In fact a couple of things are happening. Lenders are lowering rates for the best customers (just like with mortgage rates) but are not widening their credit windows so it’s difficult for any but the largest, most profitable companies to access capital. In addition, small businesses continue to feel the economic uncertainty and are delaying any plans to expand their businesses. This restrains equipment purchases, building and highering of employees – a vicious cycle. While most of this is not tied to Europe, the perception is that economic environment is not conducive to expansion. Cash is king and growth will have to wait.
The US Stock market over the last 6 months has been very volatile with little direction. YTD, the S&P is up 7%. However it’s down 4% from the April 2nd high. That volatility shows no sign of abating soon.
At the end of the year we’ll see how I finish on my predictions. So far it appears I have been too optimistic, but the next 5 months may surprise us.