WASHINGTON — It began with such promise. This time a year ago, forecasters were racing to upgrade their outlooks for what 2011 would hold.
All the gears seemed to be locking into place for what could finally be the year that an economic recovery began in earnest. Three percent growth seemed like a sure bet; 4 percent seemed more than plausible.
Then reality set in. The first few pieces of economic data in 2011, the analysts chalked up to bad luck: first some nasty winter snowstorms, then a run-up in gasoline prices amid turmoil in the Middle East, the earthquake and tsunami in Japan, the worsening of Europe's debt crisis, the divisive debt-ceiling debate.
But as the new year begins — growth for 2011 is on track to be about 1.8 percent, if fourth-quarter forecasts prove accurate — the real economic lesson of the past year is that the forces holding back the U.S. economy are bigger than people who forecast these things understood just 12 months ago.
The real reason 2011 was such a disappointment isn't bad luck. It's that the problems ailing the U.S. economy are so profound that the nation can manage strong growth only when everything goes absolutely right.
The confidence of businesses and consumers is more thoroughly shot than forecasters realized. The political system is more dysfunctional. Problems in mortgage finance and an onslaught of foreclosures have prevented a housing rebound.
The good news: There was no double dip in 2011. The recovery, now 2 1/2 years in, appears well-enough entrenched that the challenges merely slowed growth, rather than prompted a contraction.
At the same time, such slow growth — many forecasters are predicting about the same in 2012, with projections around 2.5 percent — is not enough to push joblessness down over time. It leaves little margin for error.
In other words, given the headwinds, it will take everything going right for the kind of robust expansion that would make this a recovery not just in the technical sense that economists talk about.
The goal for every economic policymaker is (or should be) that the conversations around dinner tables next December are about how a long-unemployed uncle finally found a job, a newly married cousin was able to buy a house, and Grandpa felt comfortable enough with his savings to retire.
Five questions hanging over the economy in 2012 will determine whether that is the case or it is another year of muddling along — or worse:
1. Will the U.S. political system behave itself? In 2011, American politics was ugly in ways that undermined confidence and damaged economic prospects. One key to a better economy in 2012 will be a more orderly, confidence-inspiring management of the most powerful government on Earth.
There was the April battle over spending that nearly shut down the government. The December standoff was over whether to continue a cut in the payroll tax. But most damaging was the summer brinkmanship during which many House Republicans threatened to block an increase in the debt ceiling — which would have meant a default on U.S. debt.
Even after a deal was struck, Standard & Poor's cut the U.S. government's credit rating, blaming the downgrade on the reduced "effectiveness, stability and predictability" of American policymaking.
It would be good for the economy in 2012 if Congress and the Obama administration could arrive at deals to keep the government running without such fireworks.
The first test will come in February, when payroll taxes are set to rise unless action is taken. Absent an agreement, the typical American worker will see his or her paycheck decrease by $20 a week for the rest of the year, which would probably weaken consumer spending and thus overall economic growth.
Late in 2012, the stakes get even higher.
The tax cuts President George W. Bush enacted in 2001 and 2003 are scheduled to go away Jan. 1, 2013, absent congressional action. The standoff will be between either a newly re-elected or newly defeated President Barack Obama and a Congress with the same composition but one that could also contain plenty of lame ducks.
One more thing: With the economy so fragile, it would be a terrible year to have a 2000-style extended recount of election results. It would be best for consumer and business confidence if the result is decisive and unifying.
2. Can European leaders balance every country's demands? The fate of the U.S. economy rests, to a surprising and somewhat scary degree, in the hands of German Chancellor Angela Merkel, European Central Bank President Mario Draghi and the other leaders of Europe who will collectively decide whether that continent fixes its financial troubles.
The pattern has been in place for two years: When it appears that the European debt crisis is worsening, the impact rapidly ripples across the ocean.
First the U.S. stock market drops — American companies have lots of customers in France and Italy and Spain, after all. And within months, job growth slows and the nation has entered another economic lull, a far-too-common occurrence since the recession ended in mid-2009.
That's what happened in spring 2010 and again in early 2011.
The question is whether Europe will be a force for good or ill in the U.S. growth picture in 2012. The answer rests with Europe's leaders. U.S. officials, most notably Treasury Secretary Timothy Geithner, will be a sounding board and source of pressure for action rather than decision-makers.
3. Will we be lucky enough to avoid an x-factor? Here is how you'll know the economy is back on track: when economic analysts no longer spend lots of time explaining how random, unpredictable events are behind weak growth.
In the past year, the list included the Arab Spring and its accompanying rise in global oil prices, supply disruptions from the Japanese earthquake and tsunami, and Hurricane Irene in the fall.
The British achieved a rare hat trick in 2011: Weak growth was blamed at various times on winter blizzards, people skipping work for the royal wedding in the spring and a heat wave in the summer.
The truth is that although all of this can meaningfully affect when economic activity happens — say, the first quarter vs. the second — it doesn't really tell much about the underlying trends in the economy. And when the economy is good, these random events mean almost nothing.
That said, a bit of good luck — meaning no surprise disruptions — would be awfully helpful.
4. Will the housing market bottom out? If 2012 is to be a year of robust growth, housing will almost certainly be key. And although it doesn't look likely that the long-depressed sector will be booming anytime soon, there are reasons to think it will start to contribute to growth.
For one, the nation has been under-building houses — constructing and renovating too few homes to keep up with population growth — for half a decade.
With 1.2 million households created each year in normal economic times (young people and new immigrants), the roughly 600,000 or fewer homes started in each of the past three years aren't enough to fulfill that demand.
Even with homeownership rates drifting downward, people have to live somewhere, and recent gains in housing starts have come primarily from apartment buildings and other multifamily properties, which are usually rentals.
From a broader economic view, that's just fine. Any newly built housing unit puts construction workers back on the job.
Even so, big problems in housing finance could hold the sector back for another year. A flood of foreclosures is holding down prices, which makes developers reluctant to build.
5. Can China manage a soft landing? The crisis in Europe isn't the only overseas threat to the U.S. economy. Troubling signs in recent months suggest that the Chinese growth juggernaut could be slowing, which raises risks for the United States and beyond.
Can China shift to greater reliance on domestic demand for consumer goods and services, and away from exports and housing, without a major recession that could endanger global growth? That answer will help determine the health of the U.S. economy in 2012 and beyond.
denverpost.com
All the gears seemed to be locking into place for what could finally be the year that an economic recovery began in earnest. Three percent growth seemed like a sure bet; 4 percent seemed more than plausible.
Then reality set in. The first few pieces of economic data in 2011, the analysts chalked up to bad luck: first some nasty winter snowstorms, then a run-up in gasoline prices amid turmoil in the Middle East, the earthquake and tsunami in Japan, the worsening of Europe's debt crisis, the divisive debt-ceiling debate.
But as the new year begins — growth for 2011 is on track to be about 1.8 percent, if fourth-quarter forecasts prove accurate — the real economic lesson of the past year is that the forces holding back the U.S. economy are bigger than people who forecast these things understood just 12 months ago.
The real reason 2011 was such a disappointment isn't bad luck. It's that the problems ailing the U.S. economy are so profound that the nation can manage strong growth only when everything goes absolutely right.
The confidence of businesses and consumers is more thoroughly shot than forecasters realized. The political system is more dysfunctional. Problems in mortgage finance and an onslaught of foreclosures have prevented a housing rebound.
The good news: There was no double dip in 2011. The recovery, now 2 1/2 years in, appears well-enough entrenched that the challenges merely slowed growth, rather than prompted a contraction.
At the same time, such slow growth — many forecasters are predicting about the same in 2012, with projections around 2.5 percent — is not enough to push joblessness down over time. It leaves little margin for error.
In other words, given the headwinds, it will take everything going right for the kind of robust expansion that would make this a recovery not just in the technical sense that economists talk about.
The goal for every economic policymaker is (or should be) that the conversations around dinner tables next December are about how a long-unemployed uncle finally found a job, a newly married cousin was able to buy a house, and Grandpa felt comfortable enough with his savings to retire.
Five questions hanging over the economy in 2012 will determine whether that is the case or it is another year of muddling along — or worse:
1. Will the U.S. political system behave itself? In 2011, American politics was ugly in ways that undermined confidence and damaged economic prospects. One key to a better economy in 2012 will be a more orderly, confidence-inspiring management of the most powerful government on Earth.
There was the April battle over spending that nearly shut down the government. The December standoff was over whether to continue a cut in the payroll tax. But most damaging was the summer brinkmanship during which many House Republicans threatened to block an increase in the debt ceiling — which would have meant a default on U.S. debt.
Even after a deal was struck, Standard & Poor's cut the U.S. government's credit rating, blaming the downgrade on the reduced "effectiveness, stability and predictability" of American policymaking.
It would be good for the economy in 2012 if Congress and the Obama administration could arrive at deals to keep the government running without such fireworks.
The first test will come in February, when payroll taxes are set to rise unless action is taken. Absent an agreement, the typical American worker will see his or her paycheck decrease by $20 a week for the rest of the year, which would probably weaken consumer spending and thus overall economic growth.
Late in 2012, the stakes get even higher.
The tax cuts President George W. Bush enacted in 2001 and 2003 are scheduled to go away Jan. 1, 2013, absent congressional action. The standoff will be between either a newly re-elected or newly defeated President Barack Obama and a Congress with the same composition but one that could also contain plenty of lame ducks.
One more thing: With the economy so fragile, it would be a terrible year to have a 2000-style extended recount of election results. It would be best for consumer and business confidence if the result is decisive and unifying.
2. Can European leaders balance every country's demands? The fate of the U.S. economy rests, to a surprising and somewhat scary degree, in the hands of German Chancellor Angela Merkel, European Central Bank President Mario Draghi and the other leaders of Europe who will collectively decide whether that continent fixes its financial troubles.
The pattern has been in place for two years: When it appears that the European debt crisis is worsening, the impact rapidly ripples across the ocean.
First the U.S. stock market drops — American companies have lots of customers in France and Italy and Spain, after all. And within months, job growth slows and the nation has entered another economic lull, a far-too-common occurrence since the recession ended in mid-2009.
That's what happened in spring 2010 and again in early 2011.
The question is whether Europe will be a force for good or ill in the U.S. growth picture in 2012. The answer rests with Europe's leaders. U.S. officials, most notably Treasury Secretary Timothy Geithner, will be a sounding board and source of pressure for action rather than decision-makers.
3. Will we be lucky enough to avoid an x-factor? Here is how you'll know the economy is back on track: when economic analysts no longer spend lots of time explaining how random, unpredictable events are behind weak growth.
In the past year, the list included the Arab Spring and its accompanying rise in global oil prices, supply disruptions from the Japanese earthquake and tsunami, and Hurricane Irene in the fall.
The British achieved a rare hat trick in 2011: Weak growth was blamed at various times on winter blizzards, people skipping work for the royal wedding in the spring and a heat wave in the summer.
The truth is that although all of this can meaningfully affect when economic activity happens — say, the first quarter vs. the second — it doesn't really tell much about the underlying trends in the economy. And when the economy is good, these random events mean almost nothing.
That said, a bit of good luck — meaning no surprise disruptions — would be awfully helpful.
4. Will the housing market bottom out? If 2012 is to be a year of robust growth, housing will almost certainly be key. And although it doesn't look likely that the long-depressed sector will be booming anytime soon, there are reasons to think it will start to contribute to growth.
For one, the nation has been under-building houses — constructing and renovating too few homes to keep up with population growth — for half a decade.
With 1.2 million households created each year in normal economic times (young people and new immigrants), the roughly 600,000 or fewer homes started in each of the past three years aren't enough to fulfill that demand.
Even with homeownership rates drifting downward, people have to live somewhere, and recent gains in housing starts have come primarily from apartment buildings and other multifamily properties, which are usually rentals.
From a broader economic view, that's just fine. Any newly built housing unit puts construction workers back on the job.
Even so, big problems in housing finance could hold the sector back for another year. A flood of foreclosures is holding down prices, which makes developers reluctant to build.
5. Can China manage a soft landing? The crisis in Europe isn't the only overseas threat to the U.S. economy. Troubling signs in recent months suggest that the Chinese growth juggernaut could be slowing, which raises risks for the United States and beyond.
Can China shift to greater reliance on domestic demand for consumer goods and services, and away from exports and housing, without a major recession that could endanger global growth? That answer will help determine the health of the U.S. economy in 2012 and beyond.
denverpost.com
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