Economy on unexpected upswing as year nears end

WASHINGTON — A spate of unexpectedly good economic data suggest that this quarter 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 policymakers.

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 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.

Even that estimate could be optimistic if lawmakers fail to extend aid for the long-term unemployed and a payroll tax cut for the United States' 160 million wage earners. At stake is about $150 billion, the bulk of which would go to middle-class families and the unemployed. If Congress does not pass the measures, economists say, it would significantly weaken growth from already-damped levels anticipated early in the new year.

"Unfortunately, I think we're going to see a slowdown over the course of next year," said Ethan Harris, co-head of global economics research at Bank of America Merrill Lynch.

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 Barack 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.

This quarter benefited, for instance, from wholesalers restocking inventories of goods like petroleum, paper and cars, giving a jolt to growth.

Consumers also pulled back on their savings, helping to finance a recent spurt in spending, a trend that forecasters doubt will continue. Other short-lived factors include falling gasoline and commodity prices, and an increase in orders from Japanese companies returning to business after the devastating spring tsunami.

Next year, Washington is increasing some taxes and reducing spending as temporary measures enacted during the worst of the recession expire. That will damp growth by a percentage point or more next year, forecasters say. Provisions like a tax writeoff to help businesses pay for equipment are winding down or ending.

Most worrying is the prospect that Congress will drop aid for the long-term jobless and allow payroll taxes to rise to 6.2 percent from the current level of 4.2 percent, amounting to a $1,000 tax increase on the average wage earner. Macroeconomic Advisers, a prominent forecaster, estimates that the expiration of the two provisions could cost the economy 400,000 jobs and cut growth by half a percentage point next year.

Economy on unexpected upswing as year nears end 12/21/11 [Last modified: Wednesday, December 21, 2011 9:36pm]

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