Predicting the future is a tricky business but that does not stop people from trying, economists in particular. While skilled at dissecting the current state of affairs, they are fallible when predicting where it will lead. The year now ending is a good example. It began on a note of high optimism after an encouraging recovery in 2009. Since then forecasts have changed sharply in reaction to an onslaught of dramatic events. Today, optimists are in short supply. Most economists forecast a significant slowdown in 2012. It is generally accepted that the firmer tone of the economy in the third and fourth quarters of 2011 was caused by temporary forces, which quickly fade in the face of formidable headwinds ahead.
The impediments to continued private sector expansion are obvious. In this view, business capital spending is inflated by a one year 100% tax write-off, due to expire on December 31, 2011. Recent healthy levels of consumer spending are at risk due to the expiration of the payroll tax cut. Even if it is extended, the argument goes, the increase in consumption is not due to a rise in real incomes but to a decline in the savings rate. Exports will weaken as growth of foreign economies slow. Then there is the really big issue. The economy is simply too fragile to withstand cuts in government spending. Spending must be maintained and even increased to avoid a serious slowdown, it is alleged.
Maybe the pessimistic view will prevail, but it is not our view. The current positive direction of the economy appears sustainable, despite the headwinds. Business capital spending is not likely to suffer because of elimination of a tax credit. In planning for future investments, corporate managements respond to their view of economic trends. They are likely to employ their huge cash hoards as conditions continue to firm up, regardless of short-term government inducements. Regional production surveys, including the most recent Chicago Purchasing Managers survey, indicate still decent levels of manufacturing activity. In particular, the employment and new orders components of the surveys point to improving conditions ahead. Similarly, consumer spending has trended upward as consumers broadly perceive improvement ahead. They will benefit from a decline in commodity prices especially the very visible price of gasoline. Other elements of general economic health including construction and housing seem poised to add to a generally improving trend.
Beneath the surface, new growth shoots are emerging, and they will begin to have an impact before long. The boom in shale gas makes possible our energy independence, not in decades, but in the immediate future. Building out America’s highway system to accommodate LNG trucks is already a reality. Plans to expand pipelines are being developed, and at least two LNG terminals to export natural gas are planned. Housing construction has been below demographic trends for a long time now, and eventually must increase to meet rising household formations. Several prominent corporations have stated that U.S. labor costs are now competitive with foreign costs once transportation expenses are factored in. This is leading to a “resourcing” of manufacturing jobs.
In short, the U.S. economy is not without its strengths. We believe they will become more apparent in 2012, and that the year will experience an acceleration of growth. Slow economic growth is not a permanent condition of the U.S. economy.