As the election winds down and the potential for a "fiscal cliff" approaches, The Daily Transcript asked these local economists how the first three quarters of this year fared, and how do they expect the final quarter to finish.
Although there were widespread projections for economic momentum to be building and more vigorous recovery being evident at the beginning of the year, I was skeptical. Among eight local economists asked if the economy would improve in 2012, I was the only one to project a slowing economy. At the end of last year, I also called our forecast for San Diego's economy in 2012 to be "A Year to Muddle Through" (See www.nusinstitute.org/assets/resources/pageResources/Dec2011-Forecast2012.pdf.)
Both the national and local economy has continued to be sluggish and not performed as many hoped or projected. From my perspective I would say, however, the economy performed more or less as expected.
National job growth started 2012 at a fairly strong pace, jumping to well over 250,000 jobs added in each of the first two months. This subsequently slowed to only 67,000 per month on average by the second quarter of 2012. Job growth picked up somewhat in July, but each month thereafter slowed again.
To make a significant dent on the nation's high unemployment, job growth needs to be sustained at more than 250,000 per month for several years. This would only begin to address both new job entrants and discouraged workers dropping out of the labor market, as well as the current 12.1 million officially numbered unemployed.
The nation's GDP kept being revised downward from preliminary estimates. Initially reported to be growing between 2.0-2.5 percent, the last revision shows GDP grew only 1.3 percent in the 2nd quarter of 2012. This is a nearly stall rate of economic momentum that could easily tip back into recession.
Having previously unleashed two huge waves of quantitative easing (purchases of either government securities or mortgage-backed securities) in order to stimulate consumer spending and ignite business activity, the economy has not responded as hoped. The Federal Reserve's latest commitment to continue QE was implemented because the economy continues to underperform.
As the Fed keeps interest rates too low, Americans are still not saving enough and continue borrowing too much, while we consume too much and produce too little. Too much capital goes to Wall Street speculators and not enough to Main Street entrepreneurs.
San Diego has performed in much the same frenetic way. Job growth spurted and retracted. Only 15,000 jobs have been added so far in 2012, barely 1.2 percent growth, when we need 2 to 3 times that amount to significantly bring unemployment locally below 8.0 percent. Considering discouraged workers who dropped out of the labor force and those working only part-time because they cannot find full-time work, the local rate of labor underutilization is likely more than twice that rate.
There is little prospect of the final quarter of 2012 improving, and more likely continues to taper off with the uncertainties of fiscal policy. The fiscal cliff looming at the beginning of 2013, from federal tax cuts expiring and income tax brackets and credits changing, will stifle business and consumer activity. Potential automatic spending cutbacks further limit actions with little consensus expected from deeply divided government. The total impact of the fiscal cliff, if allowed to occur, will lead to another recession. (See: www.nusinstitute.org/Research/Briefs/Falling-Off-Fiscal-Cliff-Would-Devastate-San-Diego-Economy.html.)
For the national economy, the first three quarters were disappointing. Growth was positive, but was slow for both employment and the gross domestic product. I expected GDP growth to be in the 2.0 to 2.5 percent range, but it was less than 2.0 percent through the end of the second quarter.
Employment growth started the year off well, but slowed dramatically in the second quarter. The third quarter was better, but was about 100,000 jobs a month fewer than what I expected and what the economy needs. On the positive side, the unemployment rate dropped below 8 percent, something which I didn't expect until the end of the year.
I do anticipate that the fourth quarter will be stronger, with GDP growth topping the 2.0 percent rate and a pickup in employment growth as well.
The local economy did better than expected in terms of job growth, with June through September showing strong gains compared to 2011. I expect that trend to continue in the fourth quarter. The local unemployment rate has fallen to its lowest level since January 2009, and the local economy is now on pace to add more than 20,000 jobs in 2012.
I anticipated below-average growth for 2012, but the data so far this year have been coming in even weaker than I had expected. The U.S. economy has been growing since June of 2009, but at a frustratingly slow pace. Usually when the economy begins to recover from a recession, there is a period of faster than normal growth as output catches up some of what was lost. But that never happened this time. From the fourth quarter of 2009 to the fourth quarter of 2011, U.S. real GDP only grew at a 1.9 percent annual rate, compared to 3.2 percent growth for an average quarter (including recessions) going back to World War II. In the first half of this year, GDP has been growing at an even slower 1.6 percent rate.
Sluggish growth has meant very little progress with unemployment. There were 7.5 million fewer Americans working in June 2009 compared to the start of the recession. Since then, we have only added 3 million of those jobs back, despite an increase in the U.S. population of 7.3 million more people since June 2009. Before the recession, there were only a few brief episodes when the U.S. unemployment rate exceeded 8 percent. But the unemployment rate stayed above 8 percent from February 2009 through August of this year. The September number (7.8 percent) was a bit better, but we still have a long way to go.
One bright spot for 2012 that I correctly anticipated is that the depression in housing finally seems to be over. We are seeing an increase in residential construction, and I believe the bottom for house prices is also behind us. A rebound in housing is usually a key factor that contributes to above-average growth in the first few years of an economic recovery. The fact that the housing market was so dead over 2009-2011 is an important reason for the weak recovery up to this point.
However, there is no way that housing can pull this wagon all by itself. I'm particularly concerned about the recent weakness in capital spending. Moreover, firms still seem reluctant to do much new hiring. There are also a number of very troubling risk factors on the horizon. Under existing legislation, federal taxes are set to increase and spending to decrease quite dramatically, and unless changed, that could easily tip the economy back into recession at the start of next year. The situation with the financial sector in Europe remains unstable, and a flare-up of unrest in oil-producing regions in the Middle East cannot be ruled out.
I am hoping that we manage to step around each of those mines, in which case I'd expect to see a little better growth for the fourth quarter than the first three. But that is primarily because economic growth so far in 2012 has been so disappointing that it shouldn't be that hard to do better. Any way you slice it, the year 2012 is going to end up being seen as a continuation of the discouraging scenario that the U.S. has been living with for the last five years.
How did the first three quarters of this year go? The economy and financial markets staged bouts of strength and weakness during the first three quarters, while the banking sector remained on the mend.
The U.S. economy began the year with strong gains, helped by warmer-than-usual weather in many parts of the country. Growth then slowed substantially, with consumers and businesses pulling back. Housing was the one standout, with notable signs of improvement in sales and prices. Foreclosures dropped and mortgage delinquencies eased.
The world economy weakened materially, with a recession in Europe and sharp slowing in China. Declines in Chinese demands for commodities reverberated throughout the world, particularly in some of the emerging market economies.
Financial markets remained on edge during much of the period with fears that Greece, Spain, or one of the other Eurozone nations would exit the Eurozone or be forced out. In July, European Central Bank (ECB) President, Mario Draghi, pledged that policymakers would do "whatever it takes" to preserve the euro. This soothed investors.
The Federal Reserve renewed its commitment to boost the economy and reduce U.S. unemployment. It indicated that short-term interest rates would be kept close to zero through the middle of 2015 or beyond. It continued its "Operation Twist" program of buying long-term Treasury securities when shorter ones matured. It also launched a third round of quantitative easing, with the purchase of $40 billion each month of mortgage securities. The Fed's strategy was to lower not only short-term interest rates, but long-term rates including mortgage rates.
Stocks rallied despite sluggish economic growth. Aggressive monetary policy encouraged investors to take greater risk and seek the higher returns of equities.
Banks achieved some pickup in loan demand as consumer purchases of autos and other durable goods rebounded. Balance sheets healed as credit quality improved. However, interest margins were squeezed by the efforts of the Federal Reserve to drive down long-term interest rates and the regulatory grip on banks tightened.
Economic growth in the U.S. was weaker than anticipated. Although consumer spending performed relatively well, business caution triggered a considerable pullback in outlays for plant and equipment. Uncertainty about the outcome of the election and the risk of sequestration weighed heavily on business sentiment.
Third quarter corporate earnings disappointed many analysts. The drop in sales in Europe and the slowdown in orders from China impacted the revenues of many companies, particularly those selling machinery and capital equipment.
The U.S. economy is likely to finish the year with only moderate growth and job gains. Companies are likely to stay on the sidelines until they see the outcome of the election. Congress will then have to act before year-end to prevent severe budget cuts and tax increases from taking place early in 2013.
The Federal Reserve will continue to provide abundant liquidity to financial markets and keep interest rates at record lows. Banks will see further pressure to increase their capital ratios while they cope with more regulation and oversight.
On balance, the fourth quarter will represent a pivot point for the economy and financial markets. Consumers, businesses, and investors will wait for the decisions of American voters and the policy repercussions in Washington.