There has been a lot of good news about the economy in 2012. With each passing month, it seems that unemployment drops further, the stock market goes higher, and the housing market… well, that’s why there is still a pretty big question mark out there.
Economy 2012 Outlook
Typically, after an economic downturn, the stock market leads the way (it’s a leading indicator) by rising in the months before various economic reports (lagging indicators) start rising. If all goes well, the stock market’s rise, is legitimated by improving corporate earnings and then backed up by an increase in hiring that improves the employment outlook across the economy. Once these things happen, the U.S. economy kicks into gear and things march upward until the next correction, recession, or god forbid, depression.
The stock market has gone nearly straight up since the beginning of 2012. Earlier this year the Dow went over 13,000 for the first time since 2008. Not far behind, the S&P 500 index passed its 2008 high-water mark earlier this month. And, as Reuters and other report, the number of Americans filing for new unemployment benefits dropped to a four-year low. This follows the last few months of good labor market news.
So, why aren’t economists and the public at large more excited about this economic recovery. There are many reasons, but two of them really stick out.
2012 Housing Outlook
There is still a big problem out there in the housing market. Some analysts say that foreclosures are down only because the banks were holding off while negotiating a settlement over bad foreclosure practices and that a huge backlog of foreclosures is now heading for the pipeline. If this is true, the flood of new foreclosed properties onto the market, plus the economic downdraft caused by people losing their homes, and being afraid of losing their homes, could pull the whole economy back into negative territory.
Until housing is more stable and there are no huge waves of foreclosure on the horizon, it will be tough to consider this economic recovery to be on solid footing.
Will Politics Destroy the Economy?
The other very big problem out there is Washington D.C. and the increasingly polarized politicians who every day seem to care less about America and America’s wellbeing and more about what is good for their specific political party. Our so-called representatives nearly drove the world’s economy off of a cliff with their brinkmanship on the debt-ceiling.
An upcoming presidential election only makes that whole mess worse.
On one hand, with a Democratically controlled Senate and a Republican controlled House of Representatives, there is little chance of any meaningful new legislation getting passed any time before November. That means that Congress won’t be able to proactively derail the economy.
Unfortunately, there is a ticking economic time bomb waiting for this divided Congress come January 2013. That is when the huge automatic budget cuts from that debt ceiling deal are supposed to kick in. It is also when both the Bush tax cuts and Obama’s recently extended payroll tax cuts are set to expire.
In other words, three enormous amounts of money are poised to be sucked out of the economy all at once. If the train wreck that is Washington doesn’t get its act together, doing nothing may be all that is needed to make months of rosy economic news moot.
That’s why you won’t find anyone celebrating no matter how benign the economic data seems. Unless the economy is roaring hot enough to overwhelm the possible one-two punch from a sick housing market and a sick Congress, then things are still very shaky.