As we enter the New Year, it is time to reflect on the events of the past year and try to anticipate some of the drivers of the economy in the months ahead. In this blog, I will take a look at some of the key economic trends in 2012. In the following blog, I will share some thoughts on the major drivers of freight transportation in the coming 12 months.
Here are some of the economic forces shaping the economies of North America in 2012.
1. North America will avoid Recession
The United States and Canada will probably avoid a recession. The good news is that domestic risks have diminished somewhat, and growth momentum has picked up modestly. Consumers seem willing to spend and businesses are more disposed to hire—albeit cautiously. The consensus among economists is that over the next year growth in the United States and Canada will average between 1.5% and 2.0%.
2. Fundamental Changes are taking place in the Housing Market
The housing markets in Canada and the United States are vastly different. In the United States, the market seems to be reaching an inflection point. One in five homeowners owes more on their mortgage than the value of their homes. Some people continue to pay their mortgages while others have abandoned their homes. For many Americans, the dream of owning a home has turned into a financial nightmare. This is causing some former and current landholders to move to rental properties.
High unemployment is driving multi-generational families to merge and live in the same home. Some builders are constructing homes with two master bedrooms to meet this requirement. The high foreclosure rate and the low demand for these homes are creating a shift from stock speculators to home buying speculators. As reported on 60 Minutes, some neighborhoods in certain cities (e.g. Detroit) are being demolished to reduce crime (e.g. vandalism) and the inventory of homes. In Canada the hot housing market for the past decade is expected to cool over the next couple of years. This is a message we have heard before so time will tell if this will actually come to pass.
3. Debt and Expense Reduction
There isn’t a news broadcast that doesn’t talk about the debt crisis in Europe, the United States or among the citizens of Canada and the United States. Low interest rates have fueled the escalation in debt in North America that for the average person is about 150% of their annual income. There is lots of talk among politicians and private citizens about debt reduction and cutting programs. While governments and citizens must pay down their debts to avoid financial ruin, this is proving to be very tough. The debt crisis is so serious in Europe that if unresolved, it could plunge the world into a major financial crisis. All indications are that the Eurozone will suffer through a recession in 2012—a mild one if the region’s sovereign-debt problems are resolved, or a deep one if they are not. Certainly if the Euro is devalued, this will make it tougher to sell North American made goods in this market of 500 million people. As a result, if this crisis remains unresolved, it will inevitably lead to hard times for all of the world’s citizens. As one expert sees it, we are likely to see a focus on putting food on the table as opposed to presents under the Christmas tree.
4. A Focus on Exports
Both President Obama and Prime Minister Harper have spoken about the need to increase exports as a means of increasing GDP and bolstering tax revenues. This is causing both governments to take action to facilitate trade. Early in December the two leaders outlined a series of tasks that are being undertaken between the two countries to improve security and facilitate the movement of goods and services between the two countries. Prime Minister Harper is in the process of negotiating a free trade agreement with Europe. Canada and the U.S. are working on efforts to increase trade with countries in the Pacific.
5. Chronic Unemployment and Underemployment will continue
The drop in the unemployment rate in the United States to 8.6% made front page news (as Canada’s unemployment rate increased). The big debate in the U.S. Congress is over how long to extend unemployment benefits. Unlike previous recessions, the jobs are not coming back this time. There are many people who have been out of work for 6 to 12 months or more and their opportunities to be reintegrated into the workforce diminish by the day. There are many individuals who have had to accept lesser positions at lower salaries to earn an income. There is a large requirement to retrain displaced employees so they can find meaningful employment and incomes to support their families. Continuing improvements in technology are making existing workers more productive, lessening the need to hire. Hiring is not likely to keep pace with economic growth. There is no quick fix and there is not much likelihood the unemployment number will come down significantly until several months beyond the next U.S. election.
6. Inflation will ease; wage increases will remain modest
Prices have gone up this year for food, electronics and freight transportation, to name a few. Energy prices have gone up and down and would likely spike again if there was to be any increase in demand. With such a huge supply of homes and more being foreclosed every day, housing prices should remain at depressed levels at least for 2012. Interest rates will likely remain low to spur economic growth. With world growth softening and commodity prices off their peaks, inflation in every region of the world will likely decline in 2012. Without a spike in oil or food prices—triggered by a geopolitical events or bad weather—the inflation picture in 2012 will be quite benign. But wages are not keeping pace. Trying to pay higher prices for goods and services and pay down debt while wages are stagnating is not a recipe for a healthy recovery.
7. More Civil Unrest
Time Magazine named 2011 the Year of the Protestor. We are seeing civil unrest on our television screens in many parts of the world – – – the Arab Spring, Russia, Occupy Wall Street, European unrest. These movements, facilitated by the social media, have been unsuccessful to date at producing new democratic states and governments but have been a major force for upheaval. They have not produced any more middle class jobs or changes to the tax code. Despite the bloodshed in Egypt and Syria, these movements show little sign of abating. The raison d’etre for these movements grows stronger by the day.
8. Technology reaches the masses
The hot technology of our era – – – iPads and iPhones are being reduced in costs (not by Apple) by other vendors of similar products. Android smartphones and Kindle “Fire” tablets are becoming accessible to the masses. As we have seen in so many other areas of technology (e.g. laptop computers, colour printers, digital cameras), the cost of these devices is coming down. The technology coupled with social media and online shopping is creating the next wave in digital communication. The IPO of Facebook in 2012 will be one of the closest watched economic events in the New Year.
The New Year will likely be another tumultuous one as we head towards a U.S. election, hopefully a resolution of the European debt crisis and modest economic growth.
