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Some Thoughts On US Economic Growth

According to Reuters, the US economy did not grow as fast as expected in the fourth quarter. Expectation was for 3%; the economy grew 2.8%. The way I see it, the economy is growing. At this point, I'll take it.

It's been a while since I've written. Academic and professional responsibilities have been exceptional; I stretched myself a bit thin. Yet, the US economy hasn't changed all that much. Over the course of the last several months, the key economic statistics have pointed to the US economy continuing on its slow-growth path. This is particularly evident in the labor market, where the economy continues to create jobs, but at a sluggish rate. Particularly interesting to see will be January's labor figures when they are released on February 3. Most likely, we will simply see continuation of the current trend.

In the latter half of 2011, the economy added jobs as a rate in excess of 100,000 each month, hitting 200,000 in December. That seems nice, until you get the point where that's barely fast enough to keep pace with the new entrants into the labor market, let alone make a substantial dent in the approximately 6 million jobs that were lost during the recession (or in its aftermath). Think of it like this: Even if we exclude immigrants, new graduates, parents returning to the labor force because their children are now in school, etc., at the current rate of job creation, the US economy will still take about another 30 months or so just to make up for the positions lost during the last recession (and tough period that followed).

When you consider things in those terms, and given that, most likely, the US economy will continue to plod along for a while, it isn't really surprising to see that the Federal Reserve, at present, figures that interest rates will remain low through late 2014. Figure, that's right around the time that job creation should "break even" with what was lost.

Looking at the rest of 2012, I would not be surprised if the beginning of the year turned out to be much stronger than the latter part of the year. With a quick glance, the latest GDP figures suggest relatively good momentum in the final months of 2011, and some of that will likely continue into this year. And, of course by now everyone has already discussed how inventory buildup has been a key contributor to the recent improvements in GDP. But it is still worth discussing.

In the fourth quarter of 2011, inventory growth accounted for a nice chunk of the increase in gross private domestic investment. More importantly, though, this followed on the heels of four quarters of either declining or modest increase in inventory. That part is interesting. Not only are we talking about some basic restocking, but maybe firms really do expect consumers to come back, not necessarily in droves but the trickle might improve to a gentle stream. Figure, with the pace of growth in personal spending accelerating in each of the last two quarters of last year (from 0.7% in Q2 to 1.7% in Q3 to 2.0% in Q4), there can be something to this, especially when we consider how the economy created jobs over that period.

Still, debt could further subdue the expected subdued growth in consumer activity. People might end up being more aggressive in paying down their credit card bills than shopping and adding to them.

If the US existed in a vacuum, I would look at 2012 and expect the economic environment this year to be not so different from much of last year. That stated, I look at some global dynamics, particularly out of Europe, and I become a bit more cautious, as it is external shocks that I anticipate will hamper US growth in the latter part of the year.

To say that Greece is in a tough spot is an understatement, and, for all intents and purposes, it is probably safe to assume that it is some form of default. As Jamie Dimon suggested recently, the immediate impact on the US would likely be minimal. However, the concern here is the spillover. And while opinions vary regarding the actual impact, it is important to consider that many countries in Europe are either in recession or are otherwise under pressure. This could make them more susceptible to downward shocks (including a Greek default). If things were going great, then I would be less concerned about Greece. But because so many of its neighbors are already hurting, I become a bit more wary.

Given current activity in England, one might expect conditions there to worsen, as well. Don't be surprised to see GDP estimates get revised lower.

Concerns have obviously hit other countries. Ratings agencies have cut sovereign debt ratings on many European countries. Amid such dynamics, one can easily understand why the IMF recently pared back its growth estimates, especially for Advanced countries.

While I hope that this is not the case, especially for the people who live there, I would not be surprised to see many of Europe's economies deteriorate through the course of this year. While the US economy might have some reasonable momentum at present, one has to figure that repercussions from slowing activity overseas will likely take some time to fully hit here, and that could make the second half much less rosy than the first.