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Your Financial Ann Arbor Advisor - Economic Outlook for 2012
The U.S. economy grew in 2011, but at a slowerrate than everyone expected. Even moresurprising than the overall growth rate was thepattern of that growth rate throughout the year. Growth plunged to 0.4% in the first quarter andaccelerated throughout the year, with the fourthquarter now likely to produce annualized growthwell in excess of 3%.
More Upside than Downside (Though the Downside Is Scary): Morningstar economists’overall forecast for 2012 sees slightly highergrowth than the consensus of other economists,but not by a lot. However, the odds of an upsidesurprise are substantially higher than those of adownside surprise. Potential sources of an upsidesurprise include increased U.S. oil production, asharper rebound in automotive and aircraftproduction, and a stronger housing market. Corporations Are Scared Even as ConsumersAccelerate Spending: It looks like U.S. corporatemanagers are far more scared about Europe andthe economy in general than the U.S. consumeris. Recent reports seem to suggest at least someprecautionary spending cuts by corporations inthe software arena. Managers also seem to beparing inventories to the bone. However, itappears that U.S. consumers are acceleratingspending; they seem to be “thrifted out” and canno longer delay certain purchases, especially autos.This leads Morningstar economists to predictgreater production both in the U.S. and in otherworld economies that export to the U.S. in 2012.
Europe Remains at the Top of the Worry List:
The main concern here is the potential of the European sovereign debt crisis to wreak havoc onthe worldwide financial system. U.S. exports toEurope represent just 3% of U.S. GDP, and a lotof that is for basic necessities that can’t be boughtelsewhere. However, with a web of lending inwhich European banks lend to sovereigngovernments, and those governments lend themoney back to the undercapitalized banks, thefailure of any one link could bring down a healthychunk of the European banking system.China Slowing Is an Issue for Some, butPotentially Good News for the U.S.: Chinacertainly remains an issue, too, as growth thereslows modestly and the construction industrypulls back from its breakneck pace. Slowing thereis bad news for a lot of high-profile capital goodsmanufacturers in the U.S but, overall, China is aneven smaller part of U.S. GDP than Europe.Furthermore, slowing growth in China couldmean significantly lower commodity prices,especially in the U.S., which would be good newsfor low-end U.S. consumers, who wereparticularly crippled by rising commodity pricesin 2011.
Corporate margins could begin to shrink in thefuture as consumers start to gain the upper hand.Consumers are fighting every price increase toothand nail, with the possible exception of the veryhigh end of the market. The most recent examplecomes in the banking industry, where a pushbackby consumers forced several major banks to cancelproposed increases in debit card fees.Europe Will Hurt Big Firms More Than U.S.GDP: Although U.S. GDP growth may escapethe worst of the effect of a slowing Europe, U.S.multinationals may not. Many of these firmsderive 20%-40% of their revenues from Europe.Since many of those goods are produced inEurope or in other non-U.S. markets, they are notcounted in the U.S. GDP calculations, and theydon’t directly add to U.S. employment.Therefore, a weak Europe could significantlyaffect U.S. companies even if it doesn’t make adent in the U.S. GDP growth rate.
More Upside than Downside (Though the Downside Is Scary): Morningstar economists’overall forecast for 2012 sees slightly highergrowth than the consensus of other economists,but not by a lot. However, the odds of an upsidesurprise are substantially higher than those of adownside surprise. Potential sources of an upsidesurprise include increased U.S. oil production, asharper rebound in automotive and aircraftproduction, and a stronger housing market. Corporations Are Scared Even as ConsumersAccelerate Spending: It looks like U.S. corporatemanagers are far more scared about Europe andthe economy in general than the U.S. consumeris. Recent reports seem to suggest at least someprecautionary spending cuts by corporations inthe software arena. Managers also seem to beparing inventories to the bone. However, itappears that U.S. consumers are acceleratingspending; they seem to be “thrifted out” and canno longer delay certain purchases, especially autos.This leads Morningstar economists to predictgreater production both in the U.S. and in otherworld economies that export to the U.S. in 2012.
Europe Remains at the Top of the Worry List:
The main concern here is the potential of the European sovereign debt crisis to wreak havoc onthe worldwide financial system. U.S. exports toEurope represent just 3% of U.S. GDP, and a lotof that is for basic necessities that can’t be boughtelsewhere. However, with a web of lending inwhich European banks lend to sovereigngovernments, and those governments lend themoney back to the undercapitalized banks, thefailure of any one link could bring down a healthychunk of the European banking system.China Slowing Is an Issue for Some, butPotentially Good News for the U.S.: Chinacertainly remains an issue, too, as growth thereslows modestly and the construction industrypulls back from its breakneck pace. Slowing thereis bad news for a lot of high-profile capital goodsmanufacturers in the U.S but, overall, China is aneven smaller part of U.S. GDP than Europe.Furthermore, slowing growth in China couldmean significantly lower commodity prices,especially in the U.S., which would be good newsfor low-end U.S. consumers, who wereparticularly crippled by rising commodity pricesin 2011.
Financial Planner Ann Arbor
A Savvy Consumer May Limit Profit Growth:Corporate margins could begin to shrink in thefuture as consumers start to gain the upper hand.Consumers are fighting every price increase toothand nail, with the possible exception of the veryhigh end of the market. The most recent examplecomes in the banking industry, where a pushbackby consumers forced several major banks to cancelproposed increases in debit card fees.Europe Will Hurt Big Firms More Than U.S.GDP: Although U.S. GDP growth may escapethe worst of the effect of a slowing Europe, U.S.multinationals may not. Many of these firmsderive 20%-40% of their revenues from Europe.Since many of those goods are produced inEurope or in other non-U.S. markets, they are notcounted in the U.S. GDP calculations, and theydon’t directly add to U.S. employment.Therefore, a weak Europe could significantlyaffect U.S. companies even if it doesn’t make adent in the U.S. GDP growth rate.