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Economists make 2012 predictions

Expect rate of unemployment to drop slightly

- Associated Press - Monday, December 26, 2011

The U.S. economy will grow faster in 2012 — if it isn't knocked off track by upheavals in Europe — and even then won't push the unemployment rate down much, according to an Associated Press survey of leading economists.

The three dozen private, corporate and academic economists said unemployment will barely decline — from the current 8.6 percent to 8.4 percent by the time President Obama runs for re-election in November.

Still, the year is ending on an upswing, the economists said, with expectations of 2.4 percent growth next year, versus a rate of less than 2 percent in 2011. And the economy has generated at least 100,000 new jobs for five months in a row — the longest such streak since 2006, and the number of people applying for unemployment benefits has dropped to the lowest level since April 2008.

And the economy avoided a setback when Mr. Obama signed legislation Friday extending a Social Security tax cut that was to expire at year's end. But Congress could agree only on a two-month extension.

The economists surveyed Dec. 14 to 20 expect the country to create 177,000 jobs a month through Election Day 2012, which would be up from an average 132,000 jobs a month so far in 2011.

Dean Maki, chief U.S. economist at Barclays Capital, says the U.S. economy remains vulnerable to an outside shock, the biggest such threat being the risk that Europe's debt crisis will trigger a worldwide credit freeze like the one that hit Wall Street in late 2008.

A shock to the U.S. economy, he says, might not be as dangerous if it were growing at a healthier 4 percent to 5 percent annual pace. But when growth is stuck at 2 percent or 3 percent, a major global crisis could stall job creation and raise unemployment.

Even without an outside jolt, the economists expect barely enough job creation in 2012 to stay ahead of population growth and the return of discouraged workers into the labor force.

"I just don't know if it's going to be enough to bring the unemployment rate down," says Chad Moutray, chief economist for the National Association of Manufacturers.

A majority (56 percent) of the economists say the economy will get a lift from Federal Reserve policies. The Fed has said it plans to keep short-term interest rates near zero through at least mid-2013 if the economy remains weak. The central bank also has begun a campaign to try to push down mortgage rates and other long-term interest rates through next June.

The economists expect the European economy to shrink 0.5 percent in 2011 — and fall into a recession. Europe is slowing as heavily indebted countries slash spending and banks exposed to government debt curtail lending.

Among the gravest fears is that a major country like Italy will default on its debt, wiping out some banks with large holdings of European government bonds. A worldwide credit crunch like the one that followed the 2008 failure of Lehman Bros. could follow.

"If it were a big enough downturn, given the size of Europe, it could bring the world economy down into recession," says Allen Sinai, president of Decision Economics.

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