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Economic Research

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Volume 13, Number 4
Fourth Quarter 2011


2011's Reluctant Recovery: Breaking Through in 2012?

Economic forecasters expected U.S. gross domestic product growth of 3 to 4 percent in 2011, after it had expanded at an average 3 percent quarterly annualized rate in the second halves of 2009 and 2010. But this year, the economy "continued to undergo significant adjustments and face shocks that have battered the rebound in economic growth," writes policy specialist Laurel Graefe in the fourth quarter 2011 issue of EconSouth.

A series of events in the early part of 2011 were a drag on economic growth and caused consumer and business sentiment to decline. The U.S. economy suffered a number of shocks early in the year, including the spillover effects from the Japanese earthquake and tsunami in March, oil and commodity price spikes, and the political standoff over raising the federal debt ceiling, which resulted in Standard & Poor's downgrading of the U.S. credit rating.

The linchpin of the economic recovery is consumer sentiment, which "both reacts to and affects the strength of the economy," notes Graefe. Households are under pressure from high debt burdens, constrained credit, depressed home values, and high unemployment, among other things. These concerns are reflected in the University of Michigan's Consumer Sentiment Index, which experienced a dramatic decline during the third quarter, she writes.

Image of a man leaping over chart lineInflation was another concern for much of the year, as it trended above the Financial Open Market Committee's (FOMC) long-term objective of 2 percent or less. The upswing in commodity prices and a temporary increase in auto prices (due to the Japanese crisis) contributed to higher inflation. However, longer-term inflation expectations stayed relatively anchored, and resource slack in labor markets is likely to hold back further inflationary pressures in 2012, Graefe notes. Participants in the November 2011 FOMC meeting expected inflation as measured by the Personal Consumption Expenditures price index to fall into the 1.4 to 2 percent range.

Meanwhile, the economic growth will likely continue to be restrained in 2012. Even this modest forecast is vulnerable. "Most economists' assessments of the risk to the growth and employment outlook are weighed to the downside," Graefe notes. Several factors, including financial market volatility, joblessness, and weak consumer confidence, make the U.S. economy vulnerable to further shocks.

To read more about economic growth in 2011 and 2012, read the full story in the latest issue of EconSouth, available online or in print.