Last New Year's Day, most economic forecasters were predicting a good year ahead. But 2011 turned out to be another disappointment for stock investors and home sellers, and a discouraging time for job seekers.
Now, as 2012 begins, economists are hoping their crystal balls are working a bit better. Most are seeing a brighter picture.
A recent Associated Press survey of leading economists showed a consensus estimate of 2.4 percent GDP growth in 2012. That would top 2011, when growth ran at an estimated 2 percent.
If the consensus forecast were to come true, the growth would be strong enough to whittle down the unemployment rate of 8.6 percent. The rate already is down to its lowest level in nearly three years, and based on recent improvements in weekly jobless claims, appears likely to slip further.
In the year ahead, uncertainty remains as to whether the housing market will rebound (and how the election year will affect politicians' focus on that issue). There's also the question of whether European leaders can contain the region's debt crisis, or if it will evolve into a more dire fiscal situation than 2008.
Real Estate: A Continued Struggle
Most economists doubt growth will be robust enough to spark a significant rebound in the profoundly depressed real estate market. The housing sector seems to be unable to do much beyond taking one step forward and one back.
Last week, the National Association of Realtors said the number of people who signed contracts to buy homes increased in November to the highest level in a year and a half, but at the same time, the number of canceled contracts also rose.
On balance, it appears "real estate will continue to struggle not only in 2012, but well beyond," Lance Roberts, CEO and chief strategist of Streettalk Advisors, said in a written assessment.
Most forecasters also predict interest rates will stay low in 2012, and consumer inflation will settle down. Those factors should help keep the U.S. economy growing, says IHS Global Insight chief economist Nariman Behravesh.
"Growth momentum has picked up modestly," he wrote in his 2012 outlook. "Consumers seem willing to spend and businesses are more disposed to hire — albeit cautiously."
But economists are also quick to point out that 2012 is a tough year to predict because of political and foreign wild cards. For one, congressional dysfunction could worsen in a presidential election year. Some observers fear there could be a number of market-rattling political crises on Capitol Hill, such as the ones in 2011 involving the debt ceiling and payroll tax holiday.
Another unknown is the Chinese economy, which has been slowing. Over the last couple of decades, China's annual growth rate of around 10 percent has helped prop up the global economy. But now its housing sector is looking troubled, and that threatens continued expansion.
"Chinese growth can be expected to hold up at around 8 percent and further bolster Asian growth prospects — provided China's housing downturn does not evolve into something much worse," Behravesh says.
The European Question
But the even bigger fear involves the European debt crisis, whose outcome is unpredictable. It's possible that European leaders are now coming up with ways to manage the problem. In the best case scenarios, the debt mess may linger as a long-term headache, but won't get out of control.
The worst case scenarios are dire. Economists generally say there may be a 1 in 5 chance that the situation will blow up, with some European governments defaulting on their debts. That could trigger a collapse of the banks that hold those government bonds.
Government defaults and bank failures could spark a chain-reaction meltdown that could spread financial chaos around the world. Many economists say that if that were to happen, a 2012 financial crisis would make the 2008 meltdown look mild.
On the other hand, if Europeans do get a handle on their debt troubles and global interest rates and inflation stay low, the United States and other countries could see more growth than is now expected.
"There are plenty of economic, political, social and policy risks for 2012. They are not all negative. It is quite conceivable that not only the U.S. will continue to surprise on the upside, but others could, too," such as Brazil and India, Jim O'Neill, chairman of Goldman Sachs Asset Management, wrote in a letter to investors.
AUDIE CORNISH, HOST:
This is WEEKEND EDITION from NPR News. I'm Audie Cornish.
Last New Year's Day, most economists were predicting a good year ahead. But 2011 turned out to be another disappointment for stock investors and a very discouraging time for job seekers. Now economists are hoping their crystal balls are working a little bit better.
Here to tell us what the experts are saying about 2012 is NPR's senior business editor Marilyn Geewax. Welcome, Marilyn.
MARILYN GEEWAX, BYLINE: Hi, Audie.
CORNISH: So, before we look ahead, tell us why did economists turn get it so wrong in 2011?
GEEWAX: They underestimated how much our old debts are still haunting us. There really were too many people deep in the hole and especially on those mortgages. And that debt overhang has just made it impossible to get a sustained rebound in real estate.
You know, I went back and looked back at some of the predictions for housing starts. And it was the fifth year in a row that economists had predicted a turnaround and it didn't happen. Basically, every year, realtors hope for a turnaround and every year our old debts smother their hopes.
CORNISH: And debt was the buzz word for 2011, not jut for us but also for governments.
GEEWAX: That's right, exactly. In 2011, the government was buried under record debt, and lawmakers spent the year fighting over how to shrink it. Basically, they got stuck. There was a stalemate. And they really failed to significantly reduce the debt. That undermined confidence and it did hurt the stock market.
CORNISH: So when it comes to the economy, it's safe to say that 2011 was a disappointment. But today, New Year 2012, what can we look forward to?
GEEWAX: Well, now keeping in mind that poor track record for these predictions, here's what they're saying about 2012. The typical forecast is calling for a decent growth in the New Year, something like 2.5 percent. That would be a bit better than 2011, and probably be good enough to put a dent in the unemployment rate.
CORNISH: And we're so focused on the unemployment rate but, sort of, what are the other, I guess, problems that could be lurking out there for 2012?
GEEWAX: Well, the forecast for consumer inflation, which got pretty bad in 2011, is that it will settle down and interest rates will continue to stay low. The dollar probably will strengthen. And there's kind of this split verdict on where we're going with housing; some people say that prices are going to slip, others say no, really, this time we mean it - this is the year that it starts to turnaround.
On balance, I would say the consensus view is that the country will do pretty well in 2012, unless of course we totally crash. And unfortunately, the crash scenario is a possibility because there's some very big risks out there. Congressional dysfunction, for example, it could suddenly cause another one of these kind of manufactured crises, like we saw with the debt ceiling; something where the gridlock in Congress really frightens the markets.
CORNISH: And that doesn't look like it's changing going into 2012 at all.
GEEWAX: You're right. And then there's also these big risks from overseas.
CORNISH: Of course, we haven't talked about what's been going on in Europe or other places overseas. So, what can we kind of - what should we keep an eye on there?
GEEWAX: Well, it's this debt crisis in Europe that is very dangerous and it's really very unpredictable. It's possible that European leaders are going to get the debt problems under control now. But under the worst scenarios, it blows up in our faces. Some economists say that there's about a one-in-five chance that the situation could set off a chain reaction that could melt down the whole global economy.
CORNISH: OK, there has to be a bright spot. Are there other parts of the world that are going to do any better in 2012?
GEEWAX: Well, there are hopes for Asia in generally to be pretty good; Brazil, India. But there are deep concerns about China. You know, that country has grown spectacularly in recent years and that's been mostly good for U.S. businesses, like General Motors. They've sold more than three million Buicks in China.
But now, it looks like China is slowing. If it slows just a little bit, maybe not so bad. But if it slows dramatically, that could really hurt our economy.
CORNISH: NPR's senior business editor Marilyn Geewax. Marilyn, thanks so much for talking with us.
GEEWAX: You're welcome and Happy New Year. Transcript provided by NPR, Copyright NPR.