Moderate Growth with
THE U.S. ECONOMY WILL EXPERIENCE MODERATE GROWTH with relatively low inflation and steady job creation in 2012. According to the Economic Advisory Committee of the American Bankers Association, real economic activity is expected to grow at an annualized pace near the long-term poten-
tial of 2. 5 percent throughout 2012 with strong capital expenditures from businesses
and moderate consumer spending setting the stage for sustained growth.
However, structural problems remain in the labor, housing, and state
and local government sectors. Moreover,
there is considerable downside risk to
the economy, including the European
debt crisis, challenges surrounding U.S.
fiscal policy, and geopolitical threats.
… there is considerable
downside risk to the economy,
including the European debt
crisis, challenges surrounding
U.S. fiscal policy, and
The housing sector holds the keys
to a faster recovery. In the typical economic recovery, a resurgent housing
sector helps fuel employment and rising
incomes. However, this scenario has not
played out this time. The recovery of the
housing sector has been frustratingly
slow, despite record home affordability.
Home sales remain at depressed
levels. Housing starts are at historic
lows and housing prices continue to
be weighed down by a backlog of distressed properties. The Federal Reserve
has estimated that an additional 1 million foreclosed properties could come
onto the market in each of the next few
Nonetheless, there are some small
signs of improvement. The inventory
of unsold homes has declined and issuance of permits for new single-family
homes has risen from its lows. Additionally, household formation increased
in 2011—approaching its long-run
average—although we are still short
over 2 million households relative to
the historical average since the beginning of 2008.
Expectations are that it will take five
to six years for the housing sector to
addresses its imbalances and return to
Furthermore, the housing sector has
been a drag on consumer spending. The
decline in house prices from the peak of
the housing boom has resulted in more
than a $7 trillion loss of household
wealth. It is estimated every $100 in lost
housing value causes a corresponding
$3 to $5 drop in consumer spending.
This negative wealth effect emanating
from housing will likely reduce consumer spending by $200 billion to $350
billion this year.
However, recent data continue to
show gains in consumer spending. Consumers are benefitting from improved
job growth and a moderation in the
overall pace of consumer price inflation. A sign of better consumer times
has been a pick-up in the pace of light
vehicle sales suggesting some improvement in consumer confidence.
On the other hand, concerns that
gasoline prices could once again top $4
per gallon before Memorial Day could
have the undesireable outcome of caus-
ing consumers to retrench, although
I believe consumers are beginning to
adapt to $4 gas as the new normal.
m;Over the last three-month period
of November 2011 through January
2012, the economy added 200,000
jobs per month.