2012 Economic Outlook: What's in Store?

Jan. 1, 2012— -- As the US economy enters the new year, economists expect 2012 will be better than 2011. But don't pull out your party hat just yet.

Growth will be slow – between 2 and 3 percent. To many Americans, it will feel as if the economy is in recession even if it technically isn't. And economists will be warily watching events outside the US borders for any spillover effect here.

"The economy is going to be less than inspiring," predicts Mark Zandi of Moody's Analytics in West Chester, Pa. "But it will still be better than [it was in] 2011."

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There are major ramifications for an economy that is not performing on all four cylinders. Among them: The housing and auto sectors, although expected to do better in 2012, will be operating at well below normal levels. The unemployment rate is not expected to improve much, which is not good news for the 13.3 million Americans looking for work. Investors, who are somewhat more optimistic according to year-end surveys, could nonetheless remain skittish, dissecting every economic statistic until they can get a better handle on the future.

As the US economy struggles to gain a foothold, the slow economic pace will leave policymakers with little margin for error – a bad decision by Congress or the president might be enough to cause the economy to stall.

How America's economy performs may depend in part on what happens in Europe, where nations are struggling with ways to try to save the European Union and embark on a major round of belt-tightening. So far, Mr. Zandi notes, the Europeans have made some progress – mainly ensuring that European banks have access to credit.

"There will be no Lehman moment," says Zandi, referring to the US investment bank whose financial problems ultimately dried up bank lending, which helped lead to the 2008 Great Recession. In addition, many of the highly indebted nations have new governments that have pledged austerity, he says.

European belt-tightening has ramifications even in the United States. Trade with the EU represents about 2 percent of the US gross domestic product, estimates IHS Global Insight, an economic forecasting firm in Lexington, Mass.

At risk are US capital goods such as machines that help companies make other machines, computers, and auto parts, says John Silvia, chief economist at Wells Fargo Securities in Charlotte, N.C.

Even with the problems in Europe, indications are that the US will be in better shape.

Durable goods manufacturers could have a better year. Auto sales in Detroit are expected to increase by about 6.5 percent, and aerospace shipments will rise by 18 percent as the Boeing Co. starts to deliver its new 787 airplanes and its 747-8 plane, says Daniel Meckstroth, chief economist at Manufacturers Alliance/MAPI in Arlington, Va.

Automobile sales are starting at a relatively low level, making a comeback easier. Detroit automakers will sell 12.6 million light vehicles in 2011 and 13.4 million in 2012, estimates Mr. Meckstroth. In a normal year, they sell 16 million.

Housing, another industry that has been flat on its back, may see improvement as developers sell off inventories. In 2012, new housing starts should jump almost 20 percent, predicts Meckstroth. However, the industry will still be building homes at a very low rate.