My upcoming City Talk column (New Year’s Day) is devoted to my predictions for the local Savannah economy in 2012, so as a prelude I’m going to round up some opinions about the national economy and post them here on the blog over the next few days.
David Wessel at the WSJ notes predictions for continued slow growth but sees a tug of war:
For the past year and half, the U.S. has been caught in a tug of war. On one side is the economy’s natural resilience. On the other are the long-lasting effects of a burst credit bubble and some bad luck—the oil-price spike provoked by the Arab Spring, the supply-chain disruption following Japan’s earthquake. At the end of 2010, the economy’s resilience was winning. In 2011, it gave ground.
The latest incoming data are encouraging. Initial claims for unemployment compensation, one of the better early-warning signs, have fallen to their lowest level in 3½ years. Consumers say jobs are a little easier to find, another useful indicator. Housing starts and home sales are up. Inventories are lean. And, for what it’s worth, the stock market has bounced back in the past month.
Wessel posits a “virtuous circle” with one positive trend reinforcing another.
But Wessel fears the situation in Europe worsening, and he thinks political dysfunction might undo us:
The risks here are twofold: 1. Prolonged uncertainty and further erosion in confidence in the U.S. political system will discourage business from hiring or expanding in the U.S. and consumers from spending. 2. Political paralysis could prevent Washington from responding if the economy needs help, whether because of Europe or a U.S. state running into financial trouble or some unforeseen event.
And then there is the housing market. We’re told housing prices are “stabilizing,” and maybe they are. But we learned this week that they fell in October in 19 of the 20 cities tracked by the Case-Shiller index. Over the past year, its 20-city index fell 3.4%, on top of the 30% decline in the preceding four years. Wary home buyers, a still-dysfunctional mortgage market and an overhang of foreclosed homes continue to weigh on housing. If prices take another turn down, that could disrupt any virtuous circle.
I think Wessel is overly pessimistic about housing. I fully expected the recent declines in housing prices and I expect many places to see further declines in 2012, but overall sales and construction should pick up slightly.
I also think Wessel is not taking adequately into account the fact that low interest rates and high demand for U.S. treasuries will buoy investment generally. If political dysfunction does get the best of us and gridlock takes hold, then we’ll see taxes rise (quite dramatically at year’s end when the Bush tax cuts expire) and we’ll see mandatory government cuts. It will be ugly for the economy in the short run, but will be the best thing to happen in terms of the debt and deficit for the last 15 years.