economic forecasts

2012 forecast for the economy: Cautiously optimistic

December 13, 2011: 5:00 AM ET

Jobs are up, and gas prices are down.  Cash registers are ringing, and house prices are back in line. But if politicians can't get their act together, the whole show could stall out.

By John Cassidy, contributor

FORTUNE -- After four years of recession and subpar growth, could 2012 be the year the U.S. economy finally snaps out of its funk? Despite the turmoil in Europe, many Americans would like to think so, among them President Obama (whose electoral prospects are dim unless things perk up).

Let's start with the good news: Recently the economy has done better than expected. Back in June, citing rising gas prices and the drawing-down of the stimulus, I asked whether it was too early to start talking about a double-dip recession. Despite a lot of subsequent angst, it was. Between July and September, GDP rose at an annualized rate of about 2%; the fourth-quarter figure may well be close to 3%. If that rate of expansion were to be sustained, unemployment would come down (and Obama's chances would greatly improve). Most professional forecasters think growth will be more modest. In a year-end survey by the National Association of Business Economics, the median prediction for GDP growth next year was 2.4%, which is basically an extrapolation from what we've seen over the past six months. As a recovering pessimist -- from 1997 to 2007, I spent an entire decade doubting the Greenspan/Bernanke prosperity -- I have been trying to be cheerier about the economy's prospects.

There is one, and it consists of several parts. First, employers are hiring, and the unemployment rate is finally falling. Second, rising gas prices, which act like a tax on the economy, are gone for now. After topping $4 a gallon in the summer, the average price at the pump is about $3.30. Going forward, it could well dip below $3. Global stocks of crude are rising, which often augurs a fall in prices.

Third, there is a lot of pent-up demand out there. As the stampede to the malls on Black Friday showed, Americans are still inveterate shoppers. After years of scrimping and saving, they are eager to buy new cars and gadgets, remodel their homes, and splurge on expensive vacations. Outside of the still-depressed real estate sector, many businesses are doing well.

Finally, some of the imbalances that built up during the Greenspan/Bernanke credit bubble have been alleviated, if not eliminated. Relative to income, house prices are now back to their historic average. Personal-savings rates have risen. Debt burdens are down. In 2007 the typical American household was paying about 14% of its income servicing debts. Today the figure is 11%.

With household finances improving and interest rates at historic lows, a few years of 3% growth shouldn't be beyond the U.S. economy. But all else isn't equal, and therein lies the threat, which can be encapsulated in one word: politics.

If the deadlock on Capitol Hill isn't broken, the economy will be hit in January with a triple whammy of higher payroll taxes, lower unemployment benefits, and cuts in federal spending. Taken together, those measures (or non-measures) would reduce GDP by about two percentage points over the course of the year, bringing the economy dangerously close to stalling. And even if Washington does the right thing -- extending payroll tax cuts and unemployment benefits -- the outlook will hinge on another set of politicians: the ones in Europe.

It is clear what is necessary to stop the buyers' strike in continental bond markets. The European governments, led by Germany, need to empower the European Central Bank to act as a lender of last resort, boost the European bailout fund, and launch some sort of TARP equivalent to recapitalize the banks. If those things were to happen and the markets came to believe that the authorities were finally getting a grip, U.S. stock prices would rally, giving a timely boost to the economy. But even after the latest efforts to save the euro, which were set to culminate in a summit Dec. 9, who would bet on such an outcome rather than a chaotic collapse of the currency, with bank failures, and global panic?

Actually, I would -- but not heavily. Which is why I remain a very cautious optimist!

This article is from the December 26, 2011 issue of Fortune.

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