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Economic Forecast Remains Murky for Integrators

The housing market isn't likely to improve much, but consumers have more access to credit.

Phillip M. Perry · February 21, 2012

A new year traditionally brings fresh hope, but will 2012 bring a more favorable business environment?

Economists advise tempering optimism with prudence. Consumers, financial institutions, and state and city governments are still struggling to right their balance sheets. The resulting financial squeeze is putting a damper on commercial activity - and that means business owners will likely encounter another challenging year.

“We are anticipating weak growth in 2012, with a gross domestic product [GDP] increase of some 2.7 percent,” says Sophia Koropeckyj, managing director of industry economics at Moody’s Analytics, a research firm based in West Chester, Pa. She refers to U.S. GDP, which represents economic activity, or the annual total of all goods and services produced in the U.S.

At first glance a 2.7 percent rise in GDP might seem pretty good, given that the annual rate for an economy in average growth mode is 2.5 percent. Yet Moody’s number can be misleading because it is calculated off a poorly performing 2011 in which growth only stumbled forward at an estimated 1.6 percent. Says Koropeckyj: “Coming out of a recession, we usually hope for well above average growth as pent-up demand is released and as businesses ramp up production and hiring.”

Koropeckyj also cautions that her firm’s forecast could be too optimistic: “While we are still expecting a recovery in 2012, we now believe there is a 50-50 chance of lapsing into a double dip recession during the first half of the year.”

Ambiguity Bad for Growth
Moody’s vague forecast reflects the uncertainty prevalent everywhere in the economic environment. Both players on the marketing see-saw are taking breathers: Consumers are waiting for a decline in the unemployment rate and a bottoming out of the housing market before opening their wallets in appreciable numbers. And corporations are awaiting a rebound in consumer activity before bolstering work forces and investing in new property and equipment.

“Unemployment remains high and wage growth is very slow even for people who do have jobs,” points out Koropeckyj. “As a result consumer spending has not been as strong as it could be.”

And will the jobs picture improve? “The expected economic growth in 2012 is at a level which can absorb some unemployed people, but not too many,” says Koropeckyj. “So by the end of 2012 we are expecting the unemployment rate to be around 8.8 percent, not appreciably lower than the 9.1 percent level of late 2011.”

Any improvement in the jobs picture will depend largely on policy decisions at the federal level, according to Scott Hoyt, Moody’s senior director of consumer economics.“Under current law we will experience significant fiscal restraint next year, with the expiration of both the payroll tax holiday and extended unemployment benefits. Those are the two factors that most directly impact consumers.”

As for housing, consumers are wary of the continuing rounds of foreclosures and the high number of homes worth less than their mortgages. “Foreclosures and housing inventory remain quite high, maintaining downward pressure on home prices,” says Koropeckyj. “We do not anticipate house prices hitting bottom until the end of 2012.” The median price for existing home sales is expected to be $166,000 in 2012, about even with the $165,000 in 2011, which represented a decline from the $173,000 of 2010.

Housing starts are expected to reach 610,000, in 2011, up marginally from the 580,000 of 2010. The number may hit a little over one million in 2012. To put those numbers in perspective, housing starts were averaging 1.6 million annually before the current recession which began in 2008.

Perhaps the most powerful force affecting the economy is psychological: People believe they are at the end of an era in which they could view their homes as sources of equity and as assets that would continually increase in value.

  About the Author

Phillip M. Perry is a New York-based business writer and frequent contributor to CE Pro. Have a suggestion or a topic you want to read more about? Email Phillip at pperry@ehpub.com

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