Economic Insights - January 2012

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For some reason, predictions of recession or depression get an unreasonable amount of press coverage for weeks or months after the call is made.  That was especially true during the roller coaster year of 2011. Instead of the recession predicted by Nouriel Roubini and other “perma-bears,” the economy slowed early in 2011, but then picked up speed as the year progressed.  Real GDP grew just 0.3 percent at an annual rate in the first quarter, accelerated to 1.3 percent annualized growth in the second quarter, and kept accelerating to 1.8 percent in the third quarter. The consensus puts fourth quarter real GDP growth at 3.5 percent to 4.0 percent.  So, not only did the economy avoid recession, but we’re confident that economic growth in 2012 will continue to accelerate. Think of the economy as an old-fashion balance scale, with good things on one side and bad things on the other.  Our models show that the good outweighed the bad in 2009, 2010, and 2011.  And the same is true for 2012. On the good side, we see:
  • The widespread adoption of new technologies.
  • A stimulative monetary policy.
  • An improving fiscal outlook.
Let’s start with new technologies.  The U.S. is experiencing a wave of them:  cloud computing, tablet computers, and smartphones are among the most important. New oil and natural gas drilling techniques are going to have a big and growing effect in 2012.  These new technologies are increasing productivity and output despite the failed Super-Committee, the S&P downgrades, and the European financial problems. Similarly, the Fed is committed to remaining accommodative until at least early 2013.  Meanwhile, Federal government spending is declining as a share of GDP for the first time in a decade.  Combined, these factors will boost near-term growth. On the bad side, it is clear that:
  • Government spending remains far too high.
  • Excessive regulation remains burdensome.
  • Loose monetary policy is raising inflation fears.
Specifically, government spending is still very high, even though it’s falling as a share of GDP.  This limits job creation and holds back real GDP growth from its true potential. Excessive regulation does the same...

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