The National Outlook - A Preview

Highlights

• 2011 has turned out to be a disappointing year for the U.S. economy, and the risks to the forecast for 2012 and 2013 are to the downside. Our baseline (most probable) forecast shows positive but subpar economic growth in 2012 followed by a strengthening in 2013 that finally begins to lower the unemployment rate significantly.

• Congress extended the two percentage point payroll tax cut and the emergency unemployment insurance through March 2012, but both are expected to be extended through the end of the year once Congress goes back into session.

• Third-quarter real GDP growth was revised down from 2.0% to 1.8%, due to an appreciable downward revision in consumer spending that was only partially offset by an upward move in business inventory investment. Growth is expected to accelerate to 3.5% during the fourth quarter of 2011, but this is more a result of additional inventory stockpiling than an improvement in overall final demand.

• In addition to weak gains in real GDP, the U.S. economy also endured sluggish employment growth in 2011. We anticipate payrolls will expand at a slightly slower clip in 2012 before accelerating to a pace of 200 thousand new jobs per month in 2013.

• We expect the Fed will maintain the current federal funds rate target well into 2014 and the balance-sheet policies announced earlier. We expect the next policy move to involve communication strategies, mainly, steps toward greater transparency, for example, announcement of an explicit inflation objective and/or forecasts of the likely path for the federal funds rate.

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