By Diane C. Swonk, Chief Economist and Senior Managing Director, Mesirow Financial
Real GDP growth looks like it accelerated to a respectable 3.5% rate in the fourth quarter, the fastest pace in a year. Some of that strength can be attributed to the catch-up in vehicle sales and production following the Japanese earthquake. The consumer also showed signs of life with a slight uptick in employment and a drawdown in savings. Separately, apartment construction picked up, lending strength to the housing market. The primary drag on growth remained the public sector, which further contracted.
The stage is set for weaker growth in the first half of 2012. Consumer spending is expected to slow in response to more tempered employment gains, an earlier drawdown in savings and a sharp cut in financial sector bonuses. Home building is expected to continue to rebound, as higher rents have justified more apartment construction. Business investment is expected to pick up slightly, particularly as manufacturers move to reopen and retool idled plants. The trade deficit is expected to narrow, but not as much as initially thought, given the slowdown in growth abroad. Government spending will remain the biggest negative, with cuts in federal spending starting to overshadow cuts at the state and local levels. The U.S. Post Office will be hit particularly hard. Real GDP is forecast to rise at an average 2.0% pace in the first half of the year, significantly weaker than the fourth quarter, but better than much of last year.
The Federal Reserve has stated clearly that it will more explicitly forecast the fed funds rate going forward. The hope is that investors will be more willing to get off the sidelines and put their money to work in riskier and more productive investments if they have some clarity about the course of monetary policy. The challenge for the Fed will be to overcome the increased political uncertainty we are currently facing.
