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GDP report gives lackluster exit to 2011

January 03, 2012

| MoneyRates.com Senior Financial Analyst, CFA

Third-quarter gross domestic product (GDP) growth was an improvement -- albeit a slim one.

According to a late-December report by the U.S. Bureau of Economic Analysis (BEA), the U.S. economy grew at an annualized, inflation-adjusted rate of 1.8 percent in the third quarter of 2011. That represented an improvement over the second quarter's 1.3 percent growth rate, and yet the third quarter's figure was something of a disappointment.

GDP fails to meet estimates

The lukewarm GDP report marked a suitably mediocre ending to a year that began with promise for the economy, then saw the threat of recession return in the summer, before conditions settled somewhere in between.

This GDP report was a letdown because it represented the second consecutive downward revision of third-quarter GDP. The BEA had initially estimated third-quarter growth at 2.5 percent. They later revised that to 2.0 percent, and then pegged their final estimate at 1.8 percent. The revisions underlined the frustratingly slow pace of recent economic growth.

Three question marks

The slow growth may continue into 2012, because three major uncertainties dominate the economic outlook:

  1. Europe's budget dilemma. This isn't even a question of whether some countries will default on their national debt. Even if that doesn't happen, Europe is in a no-win situation because the austerity measures necessary to avert a default will be a drag on growth.
  2. Slower growth in China. It had been hoped that because of its sheer size and rapidly-developing economy, China could be an engine for global growth in the 21st century. However, there are signs that China may be entering a cyclical slowdown, putting it in less of a position to help the global economy in 2012.
  3. U.S. election. With the current situation in Washington being one of near total stalemate, it's as if progress is on hold until the November elections, and even then it's not clear whether things will get any better.

With so much uncertainty in the air, consumers and business executives alike may find it difficult to summon the confidence to make the types of decisions that would help economic growth accelerate.

The employment challenge

While a 1.8 percent growth rate is enough to keep the economy out of recession, it is not good enough to make much of a dent in the unemployment rate. This challenge is likely to persist in 2012. Not only is growth sluggish, but people may be forced to stay in the workforce longer. A dozen years of disappointing stock market returns have slowed retirement savings, while low savings account interest rates have slashed incomes to the point where it is necessary to save more money to fund retirement.

As a result, even with baby boomers starting to reach retirement age, many will be unable to give up their jobs just yet. That will put pressure on the economy to create jobs at a faster rate, which is why a 1.8 percent growth rate just isn't going to cut it.

 

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