Economic Forecast Paper

UNITED STATES ECONOMIC FORECAST THROUGH 2012

The US economy is expected to grow at a really slow pace given the fiscal outlook and government cuts in spending. It is unlikely that there will be a government stimulus package in 2012 and the reason being a divisive politics in congress and also the piling up of the public debt. Fiscal policy in the past years helped to stimulate the economy especially after the inauguration of Barack Obama. Obama signed into law 787 billion dollar stimulus package in 2009 and helped the economy to gain a boost. The following year the economy stayed kind neutral and in 2011 it was slowing down and losing points gained in the previous years. In 2012 economists are looking forward to the decisions made by government. If the Obama stimulus package that’s about creating jobs, cutting taxes on the middle class people and taxing the rich more will help to neutralize the economy. But that’s unlikely and it will have dragged the current economy to its lowest in three years.

The European Debt Crisis
The Economic health of Europe is important to the prosperity of US. Europe's ills already have damaged some U.S. interests, from multinational companies to major exporters. Individual investors have many reasons for concern, as the enthusiasm from earlier debt agreements has given way to pessimism and stock market dives. If the U.S. economy takes such a turn into 2012, Europe's financial troubles could wind up affecting the U.S. presidential election. Big American banks have outstanding loans of about $ 700 billion in Europe and in the case of a default that means a disaster for both Europe and The US. More than 20% of all U.S. exports go to Europe, making it the nation's largest trading partner. About 14% go to the 17 Eurozone countries. The real worry for U.S. business is that financial panic might cause a broad recession throughout the Eurozone, quelling the appetites of French and German consumers and businesses for U.S. products.

Inflation Forecast
According to Forecast chart “ForecastChart.com is forecasting that US Inflation Rates will be roughly 3.04% over the next year.” The table from Forecast.com shows a HDTFA of 1.16% which suggests that US inflation for the 12 months ending November, 2012 could easily fall between 4.21% and 1.88%.

Annual Inflation Rates
Last Month -2.5%
Last Year . . . . . . . . . . . . . . . . . . . . 3.5%
Last 5 Years 2.2%
Last 10 Years . . . . . . . . . . . . . . . . . 2.4%
Last 20 Years 2.5%

I believe inflation is unlikely to be a significant problem. It has risen significantly by some measures in the last year, but I believe that trend is unlikely to continue. We had exceptionally low inflation in 2010, but over the last six months, we’ve witnessed a rate of inflation well above 2%. There are three components of core inflation that have disproportionally caused the rate to be higher than the Federal Reserve Bank’s long-term target:

1. Renting homes instead of buying
In spite of ample existing home supply, many potential buyers are having trouble obtaining mortgages, and with some homeowners in foreclosure, both populations are being pushed into the rental market. I believe this is a genuine cause for concern going forward.

2. Motor Vehicles
Prices have moved higher due to supply chain disruptions from the earthquake in Japan earlier this year. The tragic events that followed reduced supply and increased pricing power for manufacturers, but I believe that dynamic will gradually be unwound over coming months as production increases and stabilize prices.

3. Apparel prices
A temporary surge in commodity prices and higher wages in Asia where the majority of clothing is manufactured has led to higher prices, which we expect to ease somewhat in the coming months.
Source: Department of Labor. GS Global ECS Research.
Forecast
2007 2008 2009 2010 2011 2012
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0% Commodity-related
Vehicles
Rent
Other
Core

Unemployment
I believe the unemployment rate will remain high that is above 9% if current economic situation remains the same. According to US Bureau of Labor Statistics data released in November, the unemployment rate declined by 0.4 percentage point to 8.6 percent. From April through October, the rate held in a narrow range from 9.0 to 9.2 percent. The number of unemployed persons, at 13.3 million, was down by 594,000 in November. The labor force, which is the sum of the unemployed and employed, was down by a little more than half that amount. But this data is not really accurate because the Bureau only counts people who are actively looking for a job and do not count the ones who have given up looking for a job. So in reality the unemployment rate is hovering at around 14-16%.

Interest Rates
Interest is expected to remain low to encourage private borrowing. After promising to keep a key short-term interest rate near zero at least through the middle of 2013, the Federal Reserve is trying to lower long-term rates, already at record lows. That will keep a lead on borrowing costs for a while, but it won't do much to help the economy. Commercial banks will keep their prime lending rate at 3.25% into 2013. The 10-year Treasury note, a benchmark for mortgage rates and corporate bonds, should remain near its current rate of 2% until growth picks up, which won’t be sooner than mid-2012. According to the Federal Reserve Bank, the Fed’s method of lowering long-term rates is a plan to sell $400 billion worth of short-term debt and buy Treasury notes and bonds with maturities of six to 30 years.

Direct Foreign Investment
Foreign investment flows will remain disappointing through 2012, according to the 2011 A.T. Kearney Foreign Direct Investment Confidence Index, a regular assessment of senior executive sentiment at the world’s largest companies. The Index also found executives are wary of making investments in the current economic climate and revealed that they expect the economic turnaround to happen no earlier than 2012. Half of the companies surveyed also report that they are postponing investments as a result of market uncertainty and difficulties in obtaining credit.
Summary
Things are looking worse for the U.S. economy than even three months ago. Since August, forecasters have revised their outlook to predict more gloom than they had expected, according to a new survey of 45 forecasters by the Federal Reserve Bank of Philadelphia. On average, economic forecasters predict real GDP growth of 2.4 percent in 2012, down from 2.6 percent in August, and the 2012 unemployment rate to be 8.8 percent, compared with 8.4 percent in November. Their predictions for 2012 and 2013 are also lower: just 2.7 percent and 3.5 percent, respectively. And that’s still higher than what the Fed itself is projecting, with a growth forecast of 2.4 to 2.7 percent for 2013.