Will 2012 be the year for economic optimists?

January 01, 2012| The Boston Globe | Link to article on Boston.com

By Jay Fitzgerald

The economic optimists have to get it right one of these days. Will this be the year?

With the nation struggling with a subpar recovery, the outlook for 2012 remains muddled. There’s still plenty to worry about, but also hopeful signs.

On the dark side, there’s the European debt crisis, and a jobless rate that is still historically high. The housing market remains in a funk. Crude oil prices are moving upward again.

“There’s not much to look forward to in 2012,’’ said Alan Clayton-Matthews, an economist at Northeastern University in Boston. “It’s going to be slow growth for the year, I fear.’’

But there are optimists out there who see the proverbial glass as half full. They see an economy that is slowly growing, payrolls that are steadily filling, and many emerging-market economies that are still expanding, providing markets for US exports.

“The truth is, I guess I have an optimistic bias heading into 2012,’’ said Jerry Webman, chief economist at OppenheimerFunds, a mutual fund company owned by Massachusetts Mutual Life Insurance Co. of Springfield. “There is a world of growth out there. There’s a lot of good stuff happening compared to [recent] years.’’

So which way will it go? Below are six reasons to be pessimistic about the new year, and six to be optimistic. Together, these 12 for ’12 could add up to another wild ride.

6 reasons for optimism


The US economy grew at an annual rate of less than 2 percent in the third quarter of 2011, but recent data suggest the economy is picking up some momentum, and likely to expand faster this year. It might be just enough to kick-start more hiring by corporations and spending by consumers, economists said.

Moody’s Analytics, a forecasting firm in West Chester, Pa., estimates the economy will expand 2.6 percent in 2012. Jerry Webman, chief economist for OppenheimerFunds, a mutual fund company owned by Massachusetts Mutual Life Insurance Co. of Springfield, said growth of 2.5 percent is possible this year. Both of those predictions are in line with a recent Associated Press survey of economists, who, on average, predicted 2.4 percent growth in 2012.


While the US and Massachusetts unemployment rates remain high, there was some encouraging news on the jobs front in 2011.

US employers added 1.4 million jobs to payrolls through November, while Massachusetts employers added 51,600 jobs, according to the US Labor Department. Nationally, the unemployment rate fell nearly a point during the year, and more than a point in Massachusetts.

Other data suggested continued jobs growth in 2012: The number of Americans filing initial claims for unemployment-insurance benefits fell last month to the lowest level since April 2008.

“The labor market is picking up,’’ said William Cheney, chief economist at John Hancock Financial in Boston. “It’s nothing too concrete, but, one way or the other, it looks like employers need more workers.’’

Corporate profits

Corporate profits continue to grow, although at a slower pace than earlier in the year.

Corporate profits increased by $32.5 billion in the third quarter of last year down from $61.25 billion in the second quarter, according to the US Commerce Department.

Mark Zandi, chief economist at Moody’s Analytics, said the trend indicates that corporations may have squeezed as much productivity out of current employees as they can, so they may have to start hiring in 2012 to keep the companies and profits growing.

“There’s no doubt many companies have plenty of cash on hand, and the question is whether they’re going to start hiring more in 2012. I think they will,’’ said Zandi.


Inflation remains in check, despite fears that ultra-low interest rates, federal deficits, and the large amounts of money the Federal Reserve has pumped into the economy would spur inflation. The underlying consumer inflation rate, which excludes volatile food and energy prices, was about 2 percent last month.

The low inflation rate means the Fed should be able to maintain policies aimed at stimulating growth and hiring.

“The fear we were printing money that would lead to inflation has not been borne out,’’ said James Swanson, chief investment strategist at MFS Investment Management, a Boston mutual fund company.


Helped by a weaker dollar, which makes American products cheaper for foreign buyers, US exports have increased over the past year, providing a boost to companies and the economy.

US exports are now hovering at or near $180 billion per month, up about $20 billion from a year ago, according to TradingEconomics.com, an online data collection site.

Some of the nation’s largest export products include machinery and equipment, aircraft and parts, industrial supplies, motor vehicles and parts, and food, feed, and beverages.

Even if Europe falls into recession, economists say other countries that buy a lot of American products – such as Canada, China, and Mexico – have stronger economies and may well be able to pick up the slack.


Another bright spot, especially in Massachusetts, is the high-tech and scientific sectors, according to economists. These sectors grew solidly last year, and that growth is expected to continue in 2012, providing another boost to the economy.

In Massachusetts, employment within the professional, scientific, and technical services has increased by about 13,300 jobs over the past year, as demand increased for software engineers and life-science workers, according to the state’s Executive Office of Labor and Workforce Development.

MFS’s Swanson said that the installed software base at many US corporations is old and outdated – and may require firms to spend more money in 2012 for critical upgrades. “There’s going to be some catch-up spending sooner or later, and that’s going to be good for high-tech,’’ he said.

6 reasons for pessimism


The debt crisis seemed to ease in recent weeks, as the European Central Bank moved to pump money into the continent’s teetering banking system. But most economists believe Europe is far from solving its long-term problems — and that could mean more problems for financial markets and the global economy.

The big question is whether Europe slips into recession next year, harming the relatively weak US recovery in the process, largely by reducing the demand for American exports.

‘‘We’re going to have waves of anxiety coming out of Europe,’’ said William Cheney, chief economist at Boston’s John Hancock Financial Services. ‘‘Europe is the big unknown, with a potential for major trouble.’’

The job market

Despite recent improvements, the jobs picture remains bleak. Unemployment rates are still high by historic standards — 8.6 percent nationally and 7 percent in Massachusetts — and the US economy is barely generating enough newjobs to keep up with population growth, according to government data and economists. The nation added an average of about 130,000 newjobs a month last year.

‘‘It’s getting better, but not fast enough,’’ said James Swanson, chief investment strategist at Boston’s MFS Investment Management. ‘‘The jobs situation is a real drag on the economy.’’


The housing market, too, appears to be improving, but not fast enough. Recent reports by the US Commerce Department and National Association of Realtors showed solid increases in both newand existing home sales in November. Sales in Massachusetts also increased.

But foreclosures remain at high levels and prices continue to decline, a sign that the housing market has yet to stabilize. The latest S&P Case-Shiller Index, a widely followed measure of the housing market, showed home prices in October falling in 19 of 20 major metropolitan areas, including Boston.

Many economists say the economy is likely to sputter unless housing, which has historically led the nation out of recession, begins a sustained recovery.

‘‘It just isn’t going well in the housing market,’’ said Mark Zandi, chief economist at Moody’s Analytics in West Chester, Pa., noting there are still 3.3 million homes in foreclosure in America. ‘‘The housing market is going to continue to put downward pressure on consumer confidence and spending.’’


Adivided Congress and a potentially bitter presidential race mean little gets done in Washington in 2012, whether it’s approving additional stimulus spending for the economy or taking action on the nation’s long-term budget problems, economists fear.

‘‘Politics is a big fat downer,’’ said John Hancock’s Cheney. ‘‘We seem incapable of that grand compromise that’s needed to help the economy. The presidential race compounds the problem, promoting a dysfunctional environment and creating market uncertainty.’’


After hitting a pre-recession peak of about $145 per barrel, the price of crude oil tumbled to the $30-$40 range by 2009, as the Great Recession deepened and demand for oil declined. But crude oil prices have since rebounded, hovering near or above $100 over the past two months.

The average price of gas is already about 20 cents per gallon higher than it was a year ago, according to AAA, and the fear is prices could go even higher, eating away at consumer confidence and spending, which accounts for about 70 percent of the nation’s economic activity.


European banks are in a far more precarious position than their US counterparts, but that doesn’t mean America’s financial system is in good shape.

The nation’s largest retail bank, Bank of America, whose stock was pounded by investors in 2011, recently signaled it may have to sell an additional $50 billion in assets to raise capital to meet newreserve requirements. Reserves are cushions that help keep banks solvent during tough economic times, when loans and investments can go bad.

Other US banks are also trying to reduce debts and shore up capital reserves. That may be good for the overall banking system’s long-term stability. But, economists note, every dollar that banks set aside for reserves is a dollar they can’t lend to help corporations expand and hire or individuals to buy houses and cars.

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