What’s the scoop on the economy?
Consumers are finally loosening the purse strings after four years of saving to restore wealth lost in the housing crash and the 2008 stock market drop. Even those with sizable debt are now willing to dip into savings to buy essentials, including big-ticket items such as cars when their clunkers reach the end of the road. But higher energy prices, due mostly to heightened tensions with Iran, will keep consumer spending in check; ending 2012 only slightly higher than in 2011.
As job creation picks up, businesses invest in new equipment to expand production after several years of slowly increasing production to work off spare capacity. Net job gains in 2011 were 113,900 and predicted net job gains in 2012 are 131,976. Fears of a severe financial crisis in Europe are lower. U.S. exports to Europe will get trimmed but not slashed as the recession there continues to shape up as mild. Finally, housing will be a small plus to the economy after subtracting from growth the past few years.
Arise Virtual Solutions is bringing back 11,000 call center jobs from abroad. Also creating jobs in the Sunshine State: trade, transportation, utilities, education, health services, leisure and hospitality. The expansion of the Panama Canal is also spurring the creation of more inland ports, including one at Winter Haven, where a logistics center will employ 2,000 people and lead to surrounding factories and warehouses.
Expect retail sales to grow 6% this year, building on solid job creation in 2012 and stronger-than-expected sales in the first two months of the year. Though a bit slower than last year, a 6% gain is more than decent and in keeping with an economy that is growing steadily.
The mild winter and early start to spring is an advantage for retailers so far and are likely to help feed growth through the next month or two. The first few months of the year are usually a quiet period for retailers - a time when consumers hang around the house waiting for spring - but early 2012 is particularly strong.
Unseasonably warm weather has kept heating costs low, leaving more cash in consumers’ pockets while piquing shoppers’ interest in sporting goods, home improvement projects and even bathing suits and sandals. As a result, February’s retail sales rose 1.1% over the previous month and 6.3% over year-earlier figures. Clothing sales were up 1.8% from January to February. Exterior home repairs and gardens beckoned, sales of home improvement goods rose 1.4%.
The risk in coming months is a largerthan-expected hike in gasoline prices, due to an escalation of tensions with Iran.
February core retail sales, which exclude autos, gasoline and building supplies, rose 0.5%. For example, in the short term, higher gasoline prices typically inflate total retail sales as consumers fork over more at the pump. Eventually, however, the higher tab for gasoline eats into disposable income and depresses sales of other consumer goods. If pump prices soar close to the $5 mark - or remain significantly over the $4 mark - it will crimp retail sales growth for the year.
Look for the U.S. trade deficit to grow in coming months as rising oil prices push imports higher. Exports will grow at a slower pace this year than last, with a recession in Europe and slower growth in emerging markets. Look for import gains to more than offset export growth as U.S. consumers keep snatching up foreign cars, electronics and other consumer goods.
Housing is on the upswing, but expect only modest gains in sales, prices and construction in 2012, as the effects of the burst housing bubble linger. As a result, home construction, usually a big engine in economic recovery, still won’t have much horsepower this year, contributing to lackluster economic growth and little improvement in the unemployment rate.
By midyear, home prices will finally be poised to begin a slow, but sustained, climb back up, as buyers become convinced the bottom has been reached. Between now and then, prices may drop an additional couple of percentage points, but will likely make it back by the end of the year. Down more than a third since 2006, prices, on average, won’t recover to previous highs for years.
Look for existing-home sales to edge up about 3% in 2012 to 4.4 million - about twice last year’s gain - as stilllow mortgage rates and stabilizing prices tempt buyers and sellers into the market. In January, faster sales reduced the inventory of unsold homes to the equivalent of six months of sales, a relatively low level that implies firmer prices this spring.No such luck for new-home sales, which will remain flat at about 310,000 this year. That’s down from 1.5 million before the crash. The inventory of unsold new homes is falling, but it’s still too high to spur a gain in sales.
Buoyed by a healthy jump in multifamily building, housing starts will reach 720,000 this year, up from 607,000 in 2011. Still, that’s different from the 2 million starts a year racked up before the bubble burst. Moreover, builders will be hesitant to start new single-family homes until new-home sales pick up. Single-family-home starts dipped 1% in January, even as overall starts rose 1.5% because of multifamily construction.