What will 2012 bring? We asked three noted economists to weigh in on the issues and forces likely to shape the business climate this year and give us their best predictions. We found surprising agreement on most issues, including the painful steps necessary to reduce the U.S. deficit. For now, the European crisis, a presidential election year and underwater homeowners will dictate much of the economic activity, they say, making 2012 a year of growth between 1 percent and 3 percent. As economist Don Grimes told us, "This modest growth is about the best we can count on."
Meet Our Experts
Dr. Frank Alcock is an economist and political scientist at New College of Florida, where he teaches world politics, international law and sustainable development. He was formerly an international policy analyst and economist at the U.S. Department of Energy.
Don Grimes is an economist at the University of Michigan. He lives in Sarasota and specializes in labor and employment. Grimes conducted a 2009-10 economic outlook study for Sarasota County.
Dr. Sean Snaith is director of the University of Central Florida’s Institute for Economic Competitiveness, specializing in business and economic forecasting. He is the keynote speaker at the Economic Development Corporation of Sarasota’s Economic Outlook 2012 luncheon at the Hyatt Regency Sarasota on Jan. 26.
Q:Given that growth will be modest, when do you think the economy will pick up?
Alcock: Possibly in three to five years, but it might take longer. I don’t see dramatic changes until the foreclosure crisis is resolved.
Snaith: 2013 will be the starting point of accelerating growth, since the outcome of the 2012 elections will resolve much of the policy uncertainty hovering over the economy.
Q: Is this is the beginning of a Japan-like period of slow or no growth for the next 20 years?
Alcock: Slow growth for five to 10 years is possible. Twenty years is a long time. Our economic growth trajectory will improve over that time frame.
Snaith: Japan was much less aggressive in attacking the recession that followed its financial crisis than the United States has been. The Fed dropped the federal funds rate to zero in six months; the Bank of Japan took six years to do the equivalent. History has shown that the more rapid and dramatic the response to financial crisis the shorter the recovery period that follows.
Q: Any bright spots in the economy nationally, statewide and locally?
Snaith: Leisure and hospitality will see benefits from pent-up demand and international visitation from emerging economies with a stronger recovery than ours. Health services will also continue to grow because of demographic drivers.
Q: Will consumer spending pick up this year?
Alcock: I don’t expect much change in 2012. Information technology changes so fast that people will continue to spend money on computers and smart phones. Healthcare, education and food/energy expenses will likely account for a larger share of shrinking budgets. Fortunately, we benefit from the discretionary spending of people from outside our region, but the severity of the housing crisis and negative home equity will continue to constrain the discretionary spending of those who live here.
Q: What about employment?
Snaith: Employment will continue to grow slowly in 2012. Professional and business services, retail, leisure and health sectors will be the strongest, while construction and state and local government employment will still be contracting.
Q: What’s your forecast for Europe and its financial crisis?
Snaith: Unless Europe can find a fiscal equivalent of the European Central Bank, the fate of the euro will be dire.
Alcock: Progress has been made in agreeing to a more robust rescue package, and new agreements on austerity measures and spending guidelines will be reached [with Portugal, Italy, Ireland, Greece and Spain]. Whether these countries can abide by the agreements remains in doubt. The euro’s days might be numbered.
Q: How will Europe’s financial crisis affect Southwest Florida?
Alcock: One or more defaults will likely lead to tightening credit and potentially higher interest rates. Should Europe lapse into another recession, this would lead to the weakening of an important export market and fewer European tourists. It would be a troublesome drag on our fragile economy.
Q: How will the politics of a presidential election year affect the nation’s ability and willingness to reduce the deficit?
Alcock: The chances of striking a meaningful deficit reduction deal before the election are all but dead. A few leaders in both parties [including President Obama and Speaker Boehner] flirted with such a deal earlier this summer; both sides have now returned to retrenched positions. The GOP has been more rigid, and they’ve made a strategic calculation to put off any grand bargain until after the election in the hopes that they’ll win the White House, take control of the Senate and avoid the need for concessions.
Snaith: The saddest part of all this bad political theater is that automatic budget cuts will not make a dent in the deficit and debt problems we face. The next big shock to the economy will not likely take place until November.
Q: Your position on the "We must raise revenues" vs. "We must cut spending" debate?
Grimes: We must raise revenues and cut spending, especially entitlement spending. The fundamental problem is that entitlement spending is growing much faster than the economy overall, and has been for 80 years. We must cut entitlement spending, about three quarters of which is Medicare, Medicaid and Social Security, for current beneficiaries; it’s not enough to affect future beneficiaries by, for example, increasing the eligibility age. Raising taxes is like the little boy sticking his finger in the dike to stop the leak. The country is still going to drown if we don’t curtail the rapidly rising waters of entitlement spending, which are about to spill over the dike.
Alcock: The math of trying to balance the budget solely through spending cuts doesn’t work, and if we try to do it that way the implications for economic growth and the distribution of economic pain are very troubling. We will ultimately find ourselves adopting many of the Simpson-Bowles recommendations with some modifications. I don’t think this will happen in 2012, but there’s an outside chance that a lame duck Congress could strike a deal in November/December after the election but before the automatic sequestrations go into effect in 2013.
Snaith: We need both. The President missed a huge chance by mothballing the recommendation of his deficit committee contained in the Simpson-Bowles report. Tax and entitlement reform must be part of the solution.
Q: How will the housing industry fare?
Grimes: Housing sales will increase in 2012, and prices will bottom out before increasing a bit in 2013. The housing sector, which is exceptionally critical to our area’s economic health, has been very difficult to forecast. We have never had this sort of housing price bust and foreclosure crisis affecting so many people, and thus we have no similar historical experiences to draw from. Housing prices over the long term go up at about the same rate as disposable income per capita. That means that nobody should ever expect price gains of more than 3 percent to 5 percent a year. When price increases exceed those sorts of values for any period of time we are in a bubble, which is going to burst eventually.
Alcock: We will witness a continued struggle in 2012, especially in our region. High unemployment, negative home equity and a backlog of foreclosures continue to reinforce one another. Sales could improve if progress is made in processing foreclosures and/or mediating alternative resolutions to delinquent cases. Prices won’t improve for another couple of years, however. The bright spots include greater affordability in the rental market and sweet deals for homebuyers with sufficient cash and/or sparkling credit.
Snaith: Without a more robust labor market turnaround, the housing sector will continue to languish. Transactions will continue to improve, but prices will still drift lower.
Q: Will we see any impact from Gov. Scott’s actions to streamline bureaucracy and lower corporate taxes in Florida?
Alcock: I would be surprised if deregulation initiatives and corporate tax rate reductions yielded substantial impacts on economic activity in Florida. My sense is that these are secondary factors for current investment and hiring decisions in most sectors of Florida’s economy. But I would be happy to be wrong about this.
Snaith: Unlikely. Florida doesn’t have a high tax problem, so cutting taxes isn’t the solution. Will it send a message that Florida is more business friendly? Yes, but it is not Florida’s unfriendliness toward business that has hamstrung our economy.
Q: Will Occupy Wall Street force politicians to confront the growing inequality in this country? How important is inequality?
Alcock: I’m less bothered by the [gap between rich and poor] than the [inequality] of opportunities, risks and responsibilities. A small segment of American society has reaped the vast bulk of economic rewards over the last couple of decades while real wages have remained stagnant for the middle class. Middle and lower income groups are now bearing the brunt of the recession. We should target middle and lower income groups for assistance, investments and opportunities as we reform our fiscal situation and work our way through the recession.
Grimes: The effort by OWS to blame high finance and the rich for our current economic problems is completely off base. The 100 percent is to blame for our problems, and the 100 percent, or at least the 85 percent living above the poverty line, are going to have to sacrifice to solve the problem, with the affluent bearing a little more of the burden. It might be politically easy to claim the 99 percent as victims, but that is neither accurate nor helpful to solving our problems.
Snaith: Our system does not guarantee equality of outcomes, nor should it. What is important is that we maintain equality of opportunity. There are few countries in the world where you can transcend the socioeconomic strata you are born into and work your way up the ladder the way that millions have done in the United States.
Q: Will municipal bonds tank this year? Stocks?
Alcock: I wouldn’t be surprised if money flocked to safer assets during the coming year, but I don’t think that all municipal bonds will be avoided, and it’s unclear whether the stock market as a whole will suffer.
Snaith: There will not be a muni bond mass default, but many states have problematic budget and pension crises that will require painful choices to be made. The stock market should climb slowly with the possibility of a fourth quarter rally in 2012.
Q: As an economist, what worries you most right now?
Grimes: In the near term, the sovereign debt crisis in Europe. In the longer term, a potential sovereign debt crisis in the United States. Like the European countries, we must bring our budget deficit and government debt under control. We don’t know when the crisis will hit the United States, but the grace period is measured in months or years, not decades.
Snaith: The European crisis and what may come in the wake of the "Arab spring."
Alcock: Rigid adherence to ideology and the failure to make commonsense compromises on economic policy.
Q: Is there anything that encourages you?
Grimes: The United States remains the center for all technological innovation in the world, and we are a magnet for the most talented international migrants. Nobody, either legally or illegally, is moving to China. We will all need to endure a small reduction in our standard of living over the next few years through less spending, higher taxes for everyone, and, most critically, lower government entitlement benefits, to rebuild our personal and governmental balance sheets. After that we will return to a sustainable growth path.
Alcock: Our American spirit, ingenuity and resilience. It will take a while to work our way through these tough economic times, but I’m confident we’ll do it and emerge stronger and wiser.
Snaith: My unrelenting belief in American exceptionalism.