EconoMonitor

Thinking Optimistically for the Year Ahead

As 2011 comes to a close, the risk of a new economic recession in the U.S. looks low. Or at least lower than it was a few months ago. Not everyone agrees, but you’ll have no trouble rounding up dismal scientists who think that better days are coming. For instance, 20 economists polled by CNN this week collectively estimate the odds of a downturn at 20%, or down slightly from 30% three months earlier. “Preliminary data is pointing to a solid fourth quarter of GDP growth that should carry the economy through the next 6 months,” says Sean Snaith, a University of Central Florida economics professor.

There’s a fair amount of supporting data for thinking that the risk of recession is low for the near term. For instance, Macroeconomic Advisers estimates that U.S. GDP rose by a strong 1.3% in October. Data from various corners of the economy also looks encouraging. Bloomberg reports that “North American railroads’ freight volumes surged 17 percent last week, the most in a year, in an indication that the U.S. economy will avoid a second recession.” Meanwhile, yesterday’s update of the ISM Chicago Business Barometer held steady in December, just below November’s seven-month high. “2011 is ending on a solid note, advises Ryan Sweet, a senior economist at Moody’s Analytics. “Manufacturing has some momentum and we’re starting to see some signs of life in housing.”

The number of people poised to buy home, as tracked by signed contracts, rose to a 19-month high in November, the National Association of Realtors reports. This appears to be more than statistical noise given the encouraging rise in housing starts and newly issued building permits in recent months.

Last week’s rise in jobless claims pares the optimism, but for the moment the trend in new filings for unemployment benefits still looks favorable. The four-week moving average for this volatile series has been steadily declining for several months and is at its lowest level since the recession was formally declared at an end as of June 2009. The implication: job growth will continue, and perhaps at a higher rate in the months ahead.

“Despite the rise in the weekly claims data, the longer-term trend … suggests that the recovery in the labor market is maintaining its momentum,” says Michael Gapen, an economist at Barclays Capital, in a research note to clients. An AP survey this month of 36 economists points to expectations for average monthly job growth of 175,000 next year, up from an average of 143,000 a month for the three months through November.

The Labor Department will confirm, or deny, the optimism for employment with next week’s release of payrolls data for December. Briefing.com sees a net gain in employment of 150,000, up from November’s rise of 120,000.

What could go wrong? Take your pick—there’s plenty to worry about, although the leading hazard is probably Europe, which appears to be destined for recession. BBC reports that 34 UK and European economists who regularly advise the Bank of England “believe recession will return to Europe next year.” Will there be a spillover effect for the global economy? Probably, but the degree of pain that awaits for the rest of the world is still open for debate.

In the U.S., the single-biggest risk factor is jobs, or the lack thereof. If the recent fall in jobless claims is a head fake, and the anticipated pick-up in hiring doesn’t materialize, much of the other revival news for the economy of late won’t mean much. Another potential trouble spot is the recent weakness in personal income.

Overall, there’s a case for cautious optimism that moderate growth will roll on in 2012. But don’t let the New Year’s revelry cloud your judgment. The recovery is still held together with glue and feathers. It’s looking better, but a strong wind could blow it all away.

If you find yourself on the fence for deciding what comes next, you’re not alone. The collective wisdom that is the stock market is betwixt and between too. The S&P 500 is basically flat on a year-over-year basis. In recent months, the equity market dipped to a slight loss vs. year-earlier levels. History suggests that when the market suffers a sustained bout of red ink in annual terms, a recession is near. By this standard, there’s plenty of uncertainty to digest. Maybe January will bring us clarity.

This post originally appeared at The Capital Spectator and is posted with permission.

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