OUTLOOK ’12: Expectations fall for the US economy

03 January 2012 21:15  [Source: ICIS news]

WASHINGTON (ICIS)--Despite some clear if modest US economic gains in 2011, the US Federal Reserve Bank has lowered its forecasts for the nation’s economy for 2012–2014.

In its rather sombre evaluation, the Fed noted that the US economy had “strengthened somewhat” in the third quarter of 2011.  But the central bank also cautioned that key sectors remain weak and the EU debt crisis continues to pose a significant danger for the US.

US gross domestic product (GDP) expanded at an annual rate of 2% in the third quarter, a reassuring improvement from the mediocre 1.3% growth rate seen in the second quarter and vastly better than the first quarter’s barely breathing 0.4% performance.

“Household spending has increased at a somewhat faster pace in recent months [and] business investment in equipment and software has continued to expand,” the central bank conceded, “but investment in non-residential structures is still weak and the housing sector remains depressed.”

The Fed’s analysts said they continue to expect only moderate economic growth in the quarters and years immediately ahead.

But, because of that moderate pace, they said “the unemployment rate will decline only gradually toward levels that the [Fed] judges to be consistent” with normal economic growth.

For 2012, the Fed lowered its GDP growth forecast to a below-trend pace of 2.5% to 2.9%, a fairly significant mark-down from its mid-year outlook in June, when it forecast a rosy 3.3% to 3.7% growth rate next year.

The Fed’s revised outlook does anticipate US GDP climbing to 3% to 3.5% in 2013, but even that forecast is down considerably from the central bank’s June prediction of 3.5% to 4.2% growth for that year.

Now, the Fed doesn’t see the US economy growing at a rate above 3.5% until 2014. 

That is significant because economists say the nation cannot make significant reductions in its persistently high unemployment rate until GDP growth reaches a steady 3.5% pace or higher for an extended period, perhaps as much as six or eight quarters.

The US jobless rate was near, at or above 9% for all of 2011 until dropping to 8.6% for November, its lowest level since March 2009.

But an 8.6% unemployment rate is still very high in terms of recent US history.  In normal economic times, the US would be expected to have a jobless rate of around 5%.  In 1999, it was 4%.

A key report by the American Chemistry Council (ACC) is even less sanguine about the US and global economic outlook for 2012 and beyond. 

In its annual year-end situation report and year-ahead outlook, the council cautioned that, while things are improving in North America, the US recovery remains fragile and faces numerous risks, especially an already developing European recession and the potentially catastrophic eurozone debt crisis.

 “Although the global economy is in its third year of recovery, the pace of improvement has slowed,” the report said, citing higher energy prices, Japan's earthquake and tsunami in March, the eurozone crisis and slowing growth in China.

“The global economy has reached a critical state,” the report said.

“A global soft-patch has emerged and has been centred in manufacturing,” the council’s economic team said, which is critical because “the manufacturing sector represents the primary customer base for chemistry”.

The analysis said: “Business investment and exports have been drivers boosting manufacturing output, but recent indicators suggest that the strong manufacturing recovery in the US has lost momentum”.

As evidence of that lost momentum, the US Department of Commerce (DOC) recently reported that new orders for US durable goods fell in October, the fourth decline in five months.

Kevin Swift, chief economist at the ACC, said that, while the US fourth quarter GDP is likely to show a fairly strong gain of 2.5% to 3% on an annual basis, “that is probably not sustainable going forward, given headwinds all around the globe, particularly in Europe”.

Swift noted that the EU industrial production report, issued in mid-December, already shows declining activity, “and what is expected will be a mild 2012 recession in Europe has already started”.

He said: “That will cause some transmission to us and, at a minimum, is going to hit us in the form of fewer exports to the EU”. He noted that US chemicals exports to Europe for 2011 are already off from a year ago.

Because the chemicals sector is often an economic trend leader in the global supply chain, he said, other US exports to Europe are likely to see declines developing in the new year as well.

“Exports are going to slow for the US economy,” he said. “Also because of China, which is experiencing some softness in its manufacturing and industrial sectors.”

The developing European recession could also impact the US recovery in an indirect but even broader fashion.

As the recession takes hold in Europe, Swift said, there could be a “flight to safety”, as an increasing number of European investors pull out of the euro market and euro-denominated investments to seek a somewhat safer harbour in the US and the dollar.

“And, as the euro weakens and the dollar appreciates, that will hurt our exports worldwide,” he said.

Whereas the Federal Reserve is predicting US GDP growth of 2.5% to 2.9% for next year, Swift said he expects growth of only about 2%.

“The likelihood is that the US will avoid another recession but that economic growth will not reach long-term trend levels until 2013,” the ACC year-end outlook report said. 

In normal economic times, what economists call “trend growth” would produce annual US GDP expansion rates of 3% to 3.5%.

“While not the most likely scenario, the probability of another recession remains elevated,” the council’s economic advisors said, adding that “the European debt crisis continues to present one of the greatest risks to the world economy”.

Paul Hodges studies key influences shaping the chemical industry in Chemicals and the Economy

By: Joe Kamalick
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