The economy never quite clicked in 2011 as the Japanese economy went into a recession due to the combined impact of the March tsunami and power shortage that resulted from the shutdown of much of their nuclear power based electrical generating capacity. Without power the Japanese couldn’t make cars or car parts which pushed Japanese GDP into the negative for 2 consecutive quarters, the definition of a recession, and U.S. GDP to near zero.
Europe didn’t help but more as a result of increased pressure on lenders to maintain large cash balances which reduced their ability and willingness to lend. The U.S. has more trade with Japan and Asia than with Europe but our banks are linked much closer to London than Shanghai. All in all a year most everyone would like to forget.
2012 should benefit from many of the factors that held back 2011. The Japanese are now back to normal industrial production levels and have a lot of cars and car parts to produce. Japan produces almost 100% of the black and red pigments for car paints which are two of the three most popular colors in the U.S. They also must rebuild tens of thousands of homes destroyed in March 2011 and have voted to spend an additional $1.2 trillion on housing and infrastructure projects in 2012 to get the process started. Japan should be a major importer of almost everything in 2012 and some of that will come from the U.S. Their auto and electronics industries will spend billions here to regain market share lost due to a lack of products to sell which will also add to U.S. GDP in 2012.
Europe will be a worry but not much of real problem. The banks need to lend again if small businesses are to risk hiring but the price of bank stocks are at multi-year lows due to a lack of revenue growth despite excellent return on investment results and literally billions in cash yielding little due to historically low interest rates. If Europe simply doesn’t get any worse, than banks will increase lending in 2012 if they are to increase revenues.
Housing starts and construction have accelerated due to an increase in new rental units. Demand for rentals is accelerating as people are reluctant to buy and bank underwriting criteria are as restrictive as they have ever been. Housing should be a net positive contributor to GDP in 2012 for the first time since 2007 and rental activity has been the first sign of a turnaround in the housing market.
There are many reasons to be excited about 2012 and not the least of which is that it is an election year. If the current administration and many members of Congress want to be re-elected then the unemployment rate had best be below 7.5% by August and trending down. Over the last few weeks, new claims for unemployment finally dropped below 375,000/week. Let’s hope that they stay there for the next year.
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