U.S. economic growth appears to have finished on a strong note in 2011, according to projections for a key indicator due out Friday morning. Yet economists warn that uncertainty both here and abroad still clouds the prospects for a sustained recovery.
Analysts expect that gross domestic product will have risen at an annual rate of 3 percent in the fourth quarter of last year. The Commerce Department’s initial estimate for that period is predicted to show the highest growth rate of 2011, well above the 1.2 percent average pace for the first three quarters.
Yet the threat of further crises in Europe, as well as uncertainty over whether Congress will extend the payroll tax holiday, make it difficult to predict whether the strong economic performance will last through 2012.
“In a normal environment, economic forecasting is a lot like weather forecasting: What it will be like tomorrow is a lot like the day before,” says Neil Dutta, U.S. economist with Bank of America Merrill Lynch. “In the volatile economic climate we’re in right now, I’m not so sure that method works.”
The numbers come on the heels of 22 straight months of job growth, with the economy adding 200,000 jobs in December. While that’s a good start, the United States will need to sustain this performance to substantially cut into its current 8.5 percent unemployment rate.
Friday’s GDP figures will offer a broad look at how the economy fared in the last three months of 2011. The details of the numbers, which will be revised twice in the months ahead, also offer insight into what’s driving growth.
Some of those details offer reason for optimism. For instance, the consensus is that personal consumption expenditures rose 1.8 percent last quarter. This measure of consumer spending on goods and services is the largest single component of GDP and a key long-term driver of economic gain.
One leading forecasting firm, Macroeconomic Advisers, projects that industrial production rose by 3 percent, driven by stronger-than-expected auto manufacturing. Investment in equipment and software, another sign of healthy growth, is forecast to have risen 2.5 percent.
Yet analysts also caution that a good chunk of the fourth-quarter growth is expected to have come from rising business inventories. That could be a sign that future growth may weaken somewhat. If retailers’ shelves are already stocked, production orders could fall in the months ahead.
The biggest danger, however, comes from the economic slowdown in Europe, one of the United States’ biggest trading partners. As Greek debt negotiations drag on, there’s still the risk that the continent could be plunged into further financial turmoil, which could in turn spread here. Meanwhile, Congress is still negotiating an extension of the payroll-tax holiday and expanded unemployment insurance. If for some reason those fail to pass, analysts caution, that could exert a further drag on economic growth.