THE YEAR AHEAD: LOOKING GOOD

The majority of analysts do not expect this frugality to last much longer. Even now there are signs of consumers coming back to life as evidenced by some pretty solid preholiday numbers. As soon as the pressures of unemployment recede somewhat and there is hope of rebound in the housing sector, the consumer may start to return to near normal. This is the key – near normal – not the crazed consumer of the last decade gobbling up every tiny luxury he could find. The ‘normal’ consumer is the one we saw in the 1980s and 1990s.

GLOBAL CHAOS
The adage used to be, ‘When the U.S. sneezes, the world catches cold.’ But now it seems that when the world catches cold, the U.S. gets pneumonia. The crisis in Europe has affected the U.S. for more than a year. The earthquake in Japan slammed the supply chain, which affected the U.S. to the tune of one percent of GDP growth. That disaster cost the Japanese almost five percent, and the world economy lost close to two percent of GDP growth.

The U.S. has become a more aggressive export nation as the dollar has weakened, and that is generally a good thing. The downside is that the U.S. is far more sensitive to the economic activity in other nations than in the past, and when Europe stops importing because it is circling the Greek drain, the U.S. is affected as well. This goes beyond trade, of course. The crisis in Greece threatens to take down the Greek banks because they hold Greek bonds. The European banks hold those bonds and are invested in the Greek banks, so they go down, too. The U.S. banks are tied to the European banks, so they go down . . . all like a bunch of climbers on a rope sliding into a crevasse, hoping that the last guy can get anchored.

The U.S. economic recovery is also tied to what happens in China, Korea, India, and Japan. It is one big interconnected mass.

THE POLITICIANS
The role of political players may be the most pressing issue of all. The world’s central banks have been trying to carry out the economic rescue on their own for more than three years. They have done all they can with interest rates, quantitative easing, and the like. They desperately need fiscal partners that are nowhere to be found. The politicians are trying to stimulate the economy at the same time they address debt and deficit.

The problem is that fixing one makes the other worse. To get out of a recession, a government lowers taxes and increases spending. To get out of debt, it raises taxes and cuts spending. Rather than make a choice, the leaders in Europe and the U.S. try to do both simultaneously and the whole system stalls.

A RUEFUL LOOK BACK
After this look ahead, I admit that almost everyone in the analysis business, including me, thought 2011 would be the emergent year, but that was before being battered by a series of ‘black swan events’: the earthquake and tsunami that wrecked the global supply chain for months; the Arab Spring that forced the price of oil into the $130 range for two quarters of the year when the price should have been almost $40 lower; and the weather-related disruptions in the U.S. throughout the spring and summer. So assuming similar events don’t occur in 2012, we can say with some certainty that yes, an economic recovery beckons. Stay tuned. – Chris Kuehl

I have only one thing to add to Dr. Kuehl’s forecast: Hang on. I believe we’re in for a good ride.

Dr. Chris Kuehl is an economic analyst for the Fabricators & Manufacturers Association, International, 833 Featherstone Road, Rockford, IL, 61107, 815-399-8775, www.fmanet.org.