U.S. 2012: A Fascinating Year Is Ahead

Richard Blackden Daily Telegraph December 15, 2011

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By Richard Blackden Economics Last updated: December 14th, 2011

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All the old electoral and economic maps of the US will be out of date in 2021

Taking Wall Street's forecasts as a measure, optimism about the US economy reached its most recent peak about a year ago.

After spending the summer of 2010 with a finger hovering over the "cut forecast" key, economists were scrambling for the "raise forecast" as Christmas came into sight. New York's seasonal cheer and the scent of year-end bonuses could not fully explain the switch. Three developments did.

On Wall Street, the Federal Reserve's decision to embark on another round of quantitative easing was the present that the stock markets had been begging for. In Washington, a sharply divided Congress was edging towards extending tax cuts introduced by President George W. Bush. And the country's shopping malls were packed.

A year on, and all three ingredients are again in place. Congress will probably extend another tax cut "“ this one a reduction in the amount levied on employees. Bond dealers expect Ben Bernanke to print more money before spring arrives. And most reports suggest the shops are full.

So, presumably, Wall Street will crank out the 3pc to 4pc forecast for growth they delivered this time last year? Forget it. A survey published this week by Bloomberg puts growth at just 2.2pc in 2012.

The discrepancy has a few explanations. Some are obvious, some less so. The majority of Wall Street's highly-paid forecasters got it so wrong this year that it makes sense to play it safe. That means predicting another 2011.

Everyone is also far more aware of the external traps for the economy. Europe's debt crisis comfortably tops the leaderboard of global hazards. The increasing tension with Iran, though, is causing iunease. Then there are the domestic traps "“ a list that starts and ends with the race for the White House. There won't be any agreement on addressing America's long-term fiscal challenges before 2013.

But there's another explanation for the absence of the US economic cheerleading that Wall Street is prone to at this time of year: predicting the behaviour of Americans is becoming harder.

Take, for example, the spending frenzy that starts two weeks before the Thanksgiving holiday and ends at Christmas. Unlike last year, no one is projecting that anything like that level of spending will be sustained into 2012. Sensibly, many expect that the 2.3pc annualised growth in consumer spending seen in the third quarter may prove a peak.

That's partly because the deleveraging by households that began in the third quarter of 2007 "“ when the ratio of household debt to disposable income reached a peak of 124pc "“ is ongoing. More interestingly, though harder to quantify, is the possibility that this economic crisis is actually changing Americans' attitude to money.

Economists at Royal Bank of Scotland expect that even when the ratio of household debt to income falls back to levels seen before the last housing boom, Americans will be reluctant to borrow on the same scale again. "The mindset really is changing and people are in a different place now," says Michelle Girard of RBS.

That the crisis may have wrought a permanent change "“ or at least one that can be measured in decades rather than years "“ on Americans shouldn't be a complete surprise.

But as a profession, economists had been confident that the compass they used to predict consumers behaviour during the boom would eventually be useful again. As 2011 draws to an end, there's less confidence.

One complained that it's hard to find a clear narrative to tell clients about the US economy for next year. When it comes to making investment decisions, these narratives do matter. David Tuckett, a professor of psychoanalysis at the University of London, has suggested in his book Minding the Markets: An Emotional Finance View of Financial Instability the role a clear story can play in compensating for the inevitable gaps in investors' knowledge when they have to make decisions.

Three years on from the financial crisis, investors and economists are finding that picking one clear story for the US economy has become harder, not easier. There's been no easy reversion to the political or economic maps that were useful before the bust.

It's the reason that 2012 promises to be a fascinating year.

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