What Could Go Right (and Wrong) for the Economy in 2012

If things go right, 2012 could signal the beginning of the end of a four-year economic slump.

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Recent improvements in the U.S. economy don't change the fact that 2011 was the latest in a series of tough economic years, dating all the way back to 2007. This year, Standard & Poor's downgraded U.S. debt for the first time ever. Unemployment is still nearly 9 percent, despite the economy adding jobs last month. Home prices throughout the country continue to fall or refuse to rise.

But the year's end has brought some encouraging news to light. The U.S. economy is growing slowly. Consumer confidence, which gauges the public's feelings about the economy and has been down for years, stabilized. According to Fannie Mae's Economics & Mortgage Market Group, Americans are now in a "wait and see" mode, hoping for the best in 2012.

[See 12 Ways to Stop America's Decline.]

Whether or not this hope is misplaced depends on a number of factors. If things go right, 2012 could signal the beginning of the end of a four-year economic slump. But if things go wrong, the modest recovery the United States is experiencing will be a brief respite from continued financial agony.

The following factors will determine the fate of 2012:

European financial crisis. Europe's financial problems are far from over. Greece, Italy, Portugal, and other European Union nations remain in danger of default. There is still a chance that the eurozone could break apart.

[See What Happens If Italy's Economy Collapses?]

European leaders are meeting this week in Brussels to work out an agreement on government spending and fiscal discipline. According to Christine Thompson, chief investment officer of Fidelity Investments bond group, the outcome of this meeting will go a long way toward determining whether the euro zone can weather the storm. If it does survive, Thompson says she expects its debt problems to have repercussions throughout the world.

"We'll continue to have two steps forward, one step back. People [are] looking at the severity of the teeth of any policy statement that comes out and viewing it very skeptically," Thompson said Tuesday at the Thomson Reuters' Lipper Investment Series 2012 Outlook panel discussion. "What that means is markets will be volatile."

If the crisis is resolved, that volatility is likely limited. However, if the crisis lingers, or Europe takes a turn for the worse, repercussions will be felt on this side of the Atlantic. "While we're not forecasting recession, we expect the combination of slightly tighter fiscal policy and potential financial shock from the crisis to result in weaker growth in the near term," wrote Andrew Tilton, senior economist at Goldman Sachs, in his 2012 investment outlook.

Political uncertainty at home. In 2011, politicians did more to hurt the economy than to help it. Congress's failure to compromise on a debt deal led to the S&P downgrade of U.S. debt. This failure led to a second one, by the congressional "super committee" charged with finding trillions in savings. At the same time, Republicans and Democrats were unable to agree on a job stimulus package. Now, they're unable to agree on a payroll tax extension. If no agreement is made, some Americans who earn more than $50,000 will be paying higher taxes next year. Right now, the only thing each side can agree on is that the impasse is the other's fault.

[See 3 Homegrown Threats to the U.S. Economic Recovery.]

"I know many Republicans have sworn an oath never to raise taxes as long as they live. How could it be that the only time there's a catch is when it comes to raising taxes on middle-class families?" asked President Barack Obama in a speech earlier this week. "How can you fight tooth-and-nail to protect high-end tax breaks for the wealthiest Americans, and yet barely lift a finger to prevent taxes going up for 160 million Americans who really need the help?"

Republicans answered this charge with an accusation that Democrats are the ones who refuse to compromise. After the super committee's failure, there is little hope for compromise on the tax issue.


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economy
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2012 presidential election