Thursday morning bought a slew of information on the state of the U.S. economy. First time unemployment claims came in at 359,000, up a bit. The Commerce Department delivered its third and final answer on GDP growth in the fourth quarter of 2011: an unrevised 3.0 percent annual rate. And Mark Zandi, chief economist at Moody's Analytics, and one of the most widely followed prognosticators, chimed in with his take: the expansion, about to enter its 34th month, is gaining steam.
"Ready to Hit the Accelerator," reads the headline on Zandi's most recent macro outlook. In the accompanying video (the first I've shot in our snappy new New York studio), Zandi explains his optimism. At root, it's about jobs. Zandi currently protects GDP growth of 2.5 percent for 2012. While that's "not boom times," he notes, it is "enough to create a little over two million jobs for the year" and bring the unemployment rate down to (or even below) 8 percent. The warm weather has helped contribute to the recent pace of jobs growth — about 250,000 payroll jobs per month.
More people working means more income and more consumer demand across the economy. Which is why the flow of data has generally been positive thus far in 2011, with retail sales growing at a "respectable rate," higher auto sales, and even some signs of life in housing. Prices are continuing to fall, as the most recent Case-Shiller report shows. But Zandi cites some improvement in the volume of existing-home sales, the brighter tone of surveys detailing the confidence of homebuilders, and a rise in housing starts, particularly in multi-family units. "House prices are still squishy," he notes, thanks to the need to work through the backlog of foreclosed properties. But Zandi believes the bottom for prices isn't too far off. "With a little bit of luck and some progress working down the foreclosure pipeline, by this time next year we'll see some substantive house price gains.
The biggest threat to the economy — and to Zandi's thesis — is oil and gas prices. Zandi notes that if oil prices simply stay where they are, which is his baseline assumption, U.S. consumers will spend $75 billion extra on gasoline in 2012 — about .5 percent of GDP -- than they would have if prices had remained at their levels of last year. Gas could easily ride to $4 per gallon nationwide in the summer driving season. "That by itself will do some damage," he notes. And further tensions in Iran could cause prices to rise further. Because high global consumption closely matches global production capacity, "there's no margin for error."
There's geopolitical risk, and then there's political risk. The memory of last summer's debilitating debt showdown may be fading, but Congress's fundamental dysfunction is once again showing signs of impeding economic growth. Congress has proven unable (or unwilling) to pass a transportation bill, which could jeopardize tens of thousands of construction jobs this summer. And a struggle over the future size and scope of the Export-Import Bank has the ability to pour some sugar in one of the engines of recent jobs growth: exports.
Zandi argues that "the U.S. expansion should its own in coming months and gain traction after the 2013 presidential inauguration." But here, too, policy contains several potential traps. At the end of 2012, the Bush era tax cuts and the Obama era payroll tax cuts are poised to expire. Meanwhile, the failure of last year's Supercommittee to reach a grand bargain means that the first of $1.2 trillion in spending cuts will start to kick in. That's a double-whammy. "Under current law, if there's no change in policy, we have a very significant fiscal headwind headed our direction," Zandi notes. All told, the combination of spending cuts and tax increases could sap GDP growth by between four and five percentage points. Zandi believes that the worst-case scenario will be averted through policy changes, thus mitigating the potential severity of the fiscal shock. "I am expecting policy changes," he said. "Growth will slow, but we'll make our way through it."
Based on the flow of data over the last several months, I share Zandi's optimism about 2012. Based on the news flow out of Washington over the last few years, I'm not sure I share his optimism about 2013.
Daniel Gross is economics editor at Yahoo! Finance
Follow him on Twitter @grossdm; email him at email@example.com
His next book, Better, Stronger, Faster: The Myth of American Decline and the Rise of a New Economy will be published by The Free Press in May, and is available for pre-order.