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.
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.)