Economic and Business Outlook, December 2011

by Douglas Williams, President and CEO

The economy rebounded modestly in the third quarter with higher consumer spending and export sales.   However, the inability of government leaders and central bankers in Europe and the United States to settle on solutions to correct heavy debt burdens and yawing budget deficits heightened anxiety about the future course of economic activity.  As a result, business managers and consumers are expected to maintain a largely defensive posture as we begin the new year.

At 70% of GDP, consumer spending is the primary engine of economic growth in the US. With persistently high levels of unemployment, limited growth in disposable incomes, and diminished home equity values, consumer priorities are still directed to reducing personal debt levels.  Until consumers see improved job security, new employment prospects, or higher earnings opportunities, there will be little opportunity for meaningful growth in consumer spending.

Other key components of GDP – business investment, government expenditures, and export sales – are encountering headwinds which suggest limited prospects for growth over the next few months.  While corporate profits continue to grow with improvements in productivity, managers are reluctant to make new investments to expand productive capacity and hire new workers in view of the compounding uncertainties on the economic landscape.  Spending by local and national governments, here and abroad, have reached levels at which capital markets will no longer provide adequate financing.  Export sales activity is a function of demand from abroad and relative currency values.  While demand for US goods and services is strong in the developing world, demand in other OECD countries is more circumspect, reflecting sluggish economic conditions.  The US Dollar is still the world’s reserve currency and its value has remained strong relative to that of many of our major trading partners.

Given these factors we expect the economy to grow slowly for the next several months in an environment of considerable vulnerability.  If European political leaders and central bankers are able to forge viable solutions to the European debt crisis and US leaders are able to convincingly correct the growth in the US budget deficit, consumers, business managers, and financial markets will respond with confidence by spending, investing for the future and taking more risk.  These actions are the ingredients for higher than expect levels of economic growth.