Economists Weigh in on 2012

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Published December 30, 2011

| FOXBusiness

As we close out 2011 and look forward to 2012, there is no shortage of pressing questions facing the financial markets.  To try to get a handle on a few of the key uncertainties investors will be greeted with next year, FOX Business surveyed a handful of well-known economists to get their thoughts about the jobs scene, interest rates, real estate and the stock market.

EMPLOYMENT

“Jobs are what are going to be critically important next year. As the risks related to Europe subside, the U.S. economy will have some upside surprises,” says John Lonski, Managing Director and Chief Economist at Moody's Capital Markets Group.

“So much depends on the labor force,” said Maury Harris, chief economist at UBS Securities.  “Typically people don’t start looking until the jobs are already there.”

The four-week average of weekly jobless claims dropped for the fourth week in a row this week, to the lowest level since June 2008.  Some economists feel the downward trend gives strength to the notion that job growth could pick up in 2012.

“What begins to happen is that as the long-term unemployed admit to the difficulty of finding work, they are willing to take lower paying jobs,” said Lonski.  

But that may not be bad news for the economy. “What happens is that you see more wage flexibility, you will see faster jobs growth later on,” says Lonski.

Chief Economist John Silvia at Wells Fargo expects approximately 1.5 million jobs to be added over the next year  

“The disconnect between skills among the American labor force and the skills in demand by firms remains the biggest challenge to stability in the labor market,” said Silvia.

THE STOCK MARKET/ECONOMY

Despite the tumultuous year in the stock market, the major equity-market indices are set to close the year flat or up slightly.

Many economists feel that equities are undervalued.

“Equities are undervalued relative to the existing level of profits, never mind projected profits,” says Lonski. “The only thing standing in the way of US equities rallying is the situation in Europe.”

As risks subside in Europe, Lonski sees substantial gains in equities over a span of several months. And that, in turn, will reinforce the positive trend in the U.S. economy of the last several months. A rally in stocks will help boost business sentiment and business spending, according to Lonski.  

David Rosenberg, Chief Economist and Strategist at Gluskin Sheff & Associates, believes that 2012 could be even more challenging than 2011, with major global transitions -- politically in the United States, financially in Europe and economically in China.  Historically, secular economic peaks are accompanied by political extremes and Rosenberg says this time is no different.

“If politics can make its way from polarization toward the center, the outlook for economic stability improves dramatically, in almost every case,” said Rosenberg.

For the United States, the largest economy in the world, GDP for the last few years has slowed since the Great Recession of 2008.  

“We expect the economy to expand 2% for the year ahead,” said Silvia, “with small gains from many sectors of the economy as opposed to a major contribution from any one segment.”

UBS Chief Economist Maury Harris thinks 2% GDP growth for 2012 is not a stretch considering the European financial crisis.

“The numbers for the U.S. have to be taken in light of the European recession,” said Harris, “and it will be a good year for the U.S.”

HOUSING

The housing market is key to the recovery. The latest housing-start figures for November showed that more builders broke ground in November than in the past 12 months, up 9.3%.

“Once prospective homebuyers are convinced that employment conditions will get better, they will go ahead and buy homes,” says Lonski.

Mortgage rates hit record lows this year, with the 30-year, fixed-rate averaging 3.91% this month, the lowest in 40 years, according to Freddie Mac's Primary Mortgage Market Survey.  Existing home sales and new home sales were both up in November, signs that the housing market could be on its way to stabilizing going into 2012.  

Lonski believes there are many financially strong households that would love to take advantage of low mortgage rates but won’t because they are afraid of housing prices being de-valued.

“Financially strong households that have spent money at Tiffany’s and on cars are afraid of putting money in housing as they don’t want to arrive too early,” says Lonski.  “But we could be surprised at how vigorously the ensuing upturn of home sales becomes.”

BOND YIELDS

Economists expect Treasury yields to rise; right now 10-year Treasury yields are around 2%.

“Expect 10-year Treasury yields to jump to around 2.66%, if we see all these other factors coming up in the economy,” said Lonski.

Economists note that Operation Twist -- the bond-buying program introduced by the Fed -- has put significant downward pressure on bond yields, and the European situation has put pressure on bond yields, too.  

“The Fed is still shell-shocked from the downturn,” said Harris, “and maybe will keep short-term rates low for too long, but that is the history of the Fed.”

THE DOLLAR

With the weakness in Europe, many economists expect the dollar to strengthen against the euro.

“The euro will move to a range of $1.20-1.25,” said Lonski. “The ECB, through its stealth quantitative easing, will push European yields lower.”

And those actions will result in the dollar strengthening, economists predict.

As for government spending, reining in outlays will be highlighted but will have limited impact in 2012, say economists.

“Crucial decisions need to be made in order to successfully navigate between the crushing national debt and the poor outlook for growth,” said Rosenberg.

The U.S. Presidential election in 2012 will also influence the economy and growth in 2012.

“We are concerned that pre-election brinksmanship will get in the way of achieving any solutions,” said Rosenberg.

Generally, economists say the outlook for growth in 2012 is positive for the United States, but many unknowns remain that could knock the U.S. and global economies backward.  The European crisis, instability in the Middle East, Vladimir Putin’s ascendency in Russia and his influence in Eastern Europe, and Iran’s nuclear capabilities all could play a role in 2012, not to mention the potential for China’s economic bubble bursting. It’s not all bad, though.

“Geopolitical developments have the potential to affect extremely positive change on the global economy,” said Rosenberg, “as the wars in Iraq and Afghanistan wind down and the worst of the Middle Eastern and African conflicts are behind us and terrorism appears to be waning.”

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