Economic forecasting is both art and science. The scientific aspect of looking into the economic future is based, in part, upon several government and private sector databases and analyzing what they mean. Predictive databases would include leading economic indicators, purchasing managers index, the consumer confidence index and projected interest rates. (For more, check out The History Of Economic Thought.)

TUTORIAL: Economics Basics

The artistry in predicting the economic future draws on the experience, knowledge and analytic ability of the forecaster in calculating the impact of the unquantifiable and unpredictable on the economy. These would include wars, famines, natural disasters, inflation, deflation, defaults, economic bubbles, changes in taxes, regime changes, revolutions and similarly unforeseen events with the power to influence an economy – regional, national or global.

Commodity prices such as staples, metals and the all-important energy sector, principally coal and oil, also impact the economy. Prices for commodities fluctuate, sometimes wildly, mainly in accord with supply and demand. However, the unpredictable may also influence prices.

With the above factors in mind, here's what economic forecasters are predicting for 2012.

Key Sectors for Economic Growth
Many economists, although not all of them agree, predict the United States' economic growth to be 2%, or slightly below that, for the first half of 2012; growth from 2 to 2.5% is expected for the second half of the year. Other more optimistic economists have forecasted a more robust economy, growing at about 3% annually.

Among the leading sectors in the modest economic upturn will be the automotive industry, which registered a robust upturn in fourth quarter sales for 2011, and a continuation of the residential construction comeback. Housing prices for existing homes in the resale market, however, may continue to decline, although in some locations housing prices are on the upturn. (To learn more about the housing markets, see 5 Worst U.S. Housing Markets.)

Further spurring economic growth, although not too vigorously, will be the manufacturing and industrial production sectors. Forecasters warn, however, not to expect a major increase in hiring, and unemployment numbers will probably remain at around 9% for the year. Other economists are predicting unemployment to be under 9%. Productive sectors will include durables and high-tech, which are not labor intensive and will not require an increase in production jobs in 2012.

Major banks now have very strict or no-lending policies and are not making loans to start-ups, and established small and medium businesses. Without capital for expansion, marketing, inventory, modernization and other purposes, growth will most likely remain flat for firms in need of cash.

With oil prices continuing to be high - as of early January 2012, at or above $100 a barrel - profit margins may stay thin for industries dependent on this energy source.

External Influences
If the ongoing European debt crisis continues or gets worse, there's a likelihood of Greek, Spanish and Italian defaults or a radical debt restructuring of their debt. The problems in Europe can also have a ripple effect in the U.S., and domestic banks could be impacted negatively.

An extension of the payroll tax cut should help the economy and increased consumer confidence, as of the end of 2011, will also promote growth if it continues through the year.

By late January, the Federal Reserve is expected to publish interest rate predictions by its senior officials, as a means of promoting economic growth by alerting potential investors on what to expect. The plan is expected to reduce borrowing costs for businesses and credit consumers by forecasting that the Fed expects to hold interest rates a notch above zero, where they've lingered for about the past three years.

Finally, the Dow Jones Industrial Average is expected to increase some 6 to 7%, although it closed at the end of 2011 near its open at the beginning of the year.

The Bottom Line
Smart, experienced analysts may be adept at economic forecasting, but nobody can see the future. So the economy, like most everything else in an uncertain world, is subject to the unpredictable. Investors are cautioned, therefore, as always, to diversify. (For more related readings, see 5 Economic Concepts Consumers Need To Know.)

Related Articles
  1. Economics

    Can the Market Predict a Recession?

    Is a bear market an indication that a recession is on the horizon?
  2. Economics

    The Truth about Productivity

    Why has labor market productivity slowed sharply around the world in recent years? One of the greatest economic mysteries out there.
  3. Economics

    3 Reasons Iran is Important in 2016

    Learn about how the global economy and Iran will be affected by the recently lifted trade embargo and sanctions from Iran, and what it means for 2016.
  4. Investing News

    U.S. Recession Without a Yield Curve Warning?

    The inverted yield curve has correctly predicted past recessions in the U.S. economy. However, that prediction model may fail in the current scenario.
  5. Investing News

    Market Outlook: No Bottom Until 2017?

    These investing pros are bearish on the market in 2016. Will there be a bottom in early 2017?
  6. Chart Advisor

    ChartAdvisor for February 5, 2016

    Weekly technical summary of the major U.S. indexes.
  7. Investing News

    Building a Case for the Bulls: 3 Opinions

    These three big names are bullish on the economy. Are there good times ahead?
  8. Fundamental Analysis

    5 Predictions for the Chinese Stock Market in 2016

    Find out why market analysts are making these five ominous predictions about the Chinese stock market in 2016, and how it may impact the entire world.
  9. Investing

    Will China Suffer a Fate Similar to That of the Soviet Union?

    Many parallels could be drawn between the former USSR and today's China, but the one similarity the CCP wants to avoid is the Soviet Union's collapse.
  10. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
RELATED FAQS
  1. How can I use a regression to see the correlation between prices and interest rates?

    In statistics, regression analysis is a widely used technique to uncover relationships among variables and determine whether ... Read Full Answer >>
  2. What are some of the limitations of run rates?

    Some limitations of a reliance on run rates include the occurrence of one-time sales, limitations on contracts, seasonality, ... Read Full Answer >>
  3. What are some real-life examples of the 80-20 rule (Pareto Principle) in practice?

    There are a number of practical applications for the 80-20 rule in diverse areas such as the distribution of wealth in economics, ... Read Full Answer >>
  4. What does the Dow Jones Industrial Average measure?

    The Dow Jones Industrial Average (DJIA) is the oldest and best-known stock market index. It measures the daily price movements ... Read Full Answer >>
  5. How many components are listed on the Dow Jones Industrial Average?

    The Dow Jones Industrial Average, or DJIA, is a stock index comprised of 30 different companies traded on the Nasdaq and ... Read Full Answer >>
  6. What is the difference between the Dow Jones Industrial Average and the S&P 500

    The Dow Jones Industrial Average (DJIA) and the S&P 500 are both widely followed American stock market indexes. The major ... Read Full Answer >>
Hot Definitions
  1. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions in a margin account. If an investor or trader holds ...
  2. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  3. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  4. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  5. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
Trading Center