December 1, 2011

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2012 Economic Forecast

Heather Stewart

December 1, 2011

Schaefer: As much as people complained about the TARP bailouts and the interventions that the U.S. government did in the fall of 2008…I think that was decisive, dramatic action that put the U.S. financial system on solid footing. In Europe there was no sharp, decisive action at the time. There was a lot of waiting around to see if the banks could solve the problems themselves, and what we’ve seen over the past few years is continuing uncertainty, continuing difficulties in the financial system of Europe.

Three years after the big financial collapse, we’re still unsure about whether Europe’s banks and governments are sound, and that may spill over into confidence in the U.S. financial system. The worse that problem gets, the higher the likelihood of continued slow job growth here.

What—if any—are the silver linings in the economic situation?

Knold: We’ve seen college enrollments go way up over the last three years. Coming out the other side, we end up with a more educated workforce. On the other hand, these are people without jobs who’d like to have one.

At some point in time, the pent-up demand has to be released. So there’s a period of future strong growth that’s going to be unleashed. But that’s not going to happen until the national economic factors are cleansed.

Tennert: There’s a great opportunity for investment at this point. Interest rates are low, and so individuals and businesses who have good credit do have access to funds for investment. While housing prices are still stabilizing, people who are looking to buy homes right now have an opportunity to borrow at a really low rate and buy at a low price.

Schaefer: During recessions, firms limit their hiring and figure out ways to do more with less. So during economic downturns, firms tend to work hard on process improvement, on streamlining their operations. This extended downturn may have caused folks to take a really hard look at staffing levels, how they do things, and work to be more efficient. It puts the firms in a position to grow once the economy picks up.

The political climate is quite heated, and the upcoming presidential election will keep the partisan rhetoric hot. How will this contentious and uncertain atmosphere impact the economy through the next year?

Knold: That’s not the primary thing I would fear. I’m more worried about the European situation and their banking system melting like ours did, and then having its ripple effect into us. The other thing would be disruptions in the Middle East and oil prices going high.

Tennert: Uncertainty and consumer confidence is such a challenge right now, and there is so much political tension that it is having an impact on the recovery nationally. Consumer confidence is not the number one factor, but it is playing an important role.

Schaefer: One of the things that really matters for economic growth is people’s expectations of whether the economy is going to grow. One of the strategies the Republican Party has been employing is to continue to press the panic button over things like the government deficit, over Social Security, over future economic growth, and we have leaders saying it’s time to panic—that’s exactly the sort of thing that causes people to stop spending money. And it’s exactly the sort of thing that could tip our economy into recession.

The debate over raising the debt ceiling was entirely political circus. There was no way that it made sense for us not to raise the debt ceiling. We’d already committed to spend that money. But by driving the federal government to the brink, it worried a lot of people. Small business owners at the time were delaying investments…and that means they delay hiring, which means job growth doesn’t get going, which means that economic growth just doesn’t happen as quickly as it could.

One of the threats is the possibility that we may see additional acts of political theater like that, where we’re trying to win votes by telling the American people that we’re about to head over a cliff. The fact is we’re not about to head over a cliff, regardless of who the president is, but the more we say it, the slower the economy is going to recover.

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