Weekend Economists Merry Little Christmas December 23-26, 2011

[Demeter]

8. Signs Point to Economy’s Rise, but Experts See a False Dawn

http://www.nytimes.com/2011/12/22/business/signs-point-to-economys-rise-but-experts-see-a-false-dawn.html?hp

As the fourth quarter draws to a close, a spate of unexpectedly good economic data suggests that it will have some of the fastest and strongest economic growth since the recovery started in 2009, causing a surge in the stock market and cheering economists, investors and policy makers.

In recent weeks, a broad range of data — like reports on new residential construction and small business confidence — have beaten analysts’ expectations. Initial claims for jobless benefits, often an early indicator of where the labor market is headed, have dropped to their lowest level since May 2008. And prominent economics groups say the economy is growing three to four times as quickly as it was early in the year, at an annual pace of about 3.7 percent.

But the good news also comes with a significant caveat. Many forecasters say the recent uptick probably does not represent the long-awaited start to a strong, sustainable recovery. Much of the current strength is caused by temporary factors. And economists expect growth to slow in the first half of 2012 to an annual pace of about 1.5 to 2 percent...“Unfortunately, I think we’re going to see a slowdown over the course of next year,” Ethan Harris, co-head of global economics research at Bank of America Merrill Lynch, told reporters last week. “Not only do we have the European crisis spilling over and hurting U.S. trade and confidence,” he said, but the United States economy also faces “homegrown shocks.”

There are two reasons for the renewed pessimism. First, economists say that temporary trends increased growth in the fourth quarter and may not continue into next year. Second, the economy faces significant headwinds in 2012: some from Europe’s long-lingering sovereign debt crisis, and some from domestic cutbacks beyond the control of President Obama, whose campaign would like to point to a brightening economic picture, not a darkening one. Even the Federal Reserve is predicting that the unemployment rate will remain around 8.6 percent by the time voters go to the polls in November...