In 2012, business leaders waited for the outcome of one uncertainty after another. As a result, it seemed the economic spark never got enough oxygen to really burst into flame, even though the fuel was there.
The biggest contributor was the 2012 Presidential election. It was a very close race between two candidates with radically different approaches to stimulating economic growth. The race itself slowed economic growth, as businesses waited to see what direction the country would take.
The second largest contributor was from the ever-pending fiscal cliff. Uncertainty over future tax rates kept $1 trillion of corporate expenditures on the sidelines, waiting for a resolution before it could be safely invested.
In the first half of the year, many businesses were waiting to see whether Obamacare would be shot down by the Supreme Court on June 28, 2012. It wasn't, but this uncertainty slowed business expansion in the first half of 2012.
The Eurozone debt crisis also wreaked havoc with the U.S. stock market. Uncertainty over whether the European Central Bank (in other words, Germany) would prevent Greece, Spain and Italy from defaulting on its debt sent the Dow down 1,000 points in May.
On a lighter note, some investors were waiting to see if the world would end on December 21, 2012, as predicted (some said) by the Mayan Calendar. Fortunately, it didn't, so we can find out how the other less-catastrophic uncertainties will resolve in 2013.
With all this uncertainty, why did the economy keep growing?
First, the Federal Reserve kept feeding it fuel, in the form of more monetary stimulus. The Fed relied on various forms of quantitative easing, announcing QE3 in September, and QE 4 in December 2012. This kept interest rates low.
Second, foreclosures started to abate after Federal Courts settled with banks over the robo-signing accusations. As a result, the housing market got better
Third, consumers waded through a lot of their debt, and resumed shopping. This was despite a lower credit card use. However, the Fed monetary stimulus resulted in lower consumer lending rates. This allowed people to take on auto, furniture and education loans.
How It Affects You
Ignore any prophets of economic doom. The U.S. economy continued to grow in 2012, despite all the uncertainty. The fiscal cliff will be resolved -- perhaps with two steps forward, one step back -- but there is a sea change in Washington, and the process reflects that. The strength of the U.S. economy is powered by the creativity, inventiveness and durability of the American people and businesses. It was not and will not be stopped, even by our elected officials.
Economic Growth and GDP:
Economic growth, as measured by GDP, grew 2% in the first quarter of 2012. It then dropped slightly to 1.3% in the second quarter but rose strongly to 3.1% in the third quarter. Preliminary estimates are that it contracted by .1% in the last quarter. Most of this variation was due to changes in government contracts with defense. These can be volatile, because they are large contracts. The fourth quarter pullback was probably in response to the threat of sequestration, which would have cut defense spending by 10%. The nation's total economic output as measured by GDP was $15.9 trillion.
Although the final estimates aren't in yet, it looks like the economy will remain within the 2-3% healthy GDP growth range. However, there are still far too many people still unemployed from the 2008 financial crisis. Economic growth should be at least 3-4% for a while to absorb all these workers. For more, see What's the Current GDP Growth Rate?.
Employment and Unemployment:
In 2012, the economy created 2.17 million jobs, as employment rose from 132.5 million to 134.7 million (preliminary estimate). On average, 180,000 jobs were created per month. This was enough to absorb new workers to the labor force, but not enough to put a substantial dent in the unemployment rate. The unemployment picture did improve, as the rate dropped from 8.9% to 7.8%. The number of unemployed fell from 12.8 million to 12.2 million. For month-by-month recap, and to compare to prior years,see Employment Statistics and Unemploymet Statistics.
Retail Sales and Credit:
Retail sales were $4.9 trllion in 2012, a healthy 5.04% rise. However, this was lower than the 8% increase realized in 2011. Most of this gain was from an increase in gas prices, which are included and not adjusted for price changes in the U.S. Census figures. It also reflected gains in auto sales, as well as new records in Black Friday and Halloween holiday sales. For a month by month description, see Retail Sales Statistics.
Much of this retail sales growth was fueled by consumer debt, as Americans took advantage of 200-year low interest rates to take out loans. By December, they owed $1.928 trillion in loans, or $16,200 per household. Credit card debt also rose, as banks grew less afraid of making bad loans. Americans owed $849.8 billion, or $7,140 per family, on their plastic. All told, consumer debt was $2.78 trillion, or $23,346 per household. This was more than before the financial crisis, although it was a healthier ratio, since it had a higher percentage of fixed-interest, low-cost loans and a lower amount of credit card debt. For more, see Consumer Debt Statistics.
Inflation, Oil and Gas Prices, and Interest Rates:
Fortunately, inflation wasn't a threat in 2012. The Federal Reserve kept interest rates at the lowest level in two centuries to stimulate economic growth. The Fed funds rate remained near zero, and the nation's central bank promised to keep it that way until the unemployment rate hit its target of 6.4%. In addition, the Fed continued to buy sub-prime mortages and U.S. Treasuries, a program known as quantitative easing.
Despite this boost in liquidity, prices only rose 1.7% during the year. The core inflation rate was slightly higher, at 1.9% but still below the Fed's target of 2%. For more, see Current Inflation Rate.
Unfortunately, oil and gas prices spiked up in the spring, to the annoyance of consumers. The national average gas price was $3.87 in March, before dropping back a bit in April. However, distribution shortages in California pushed the price above $4.50 in the fall.
Budget, Deficit and Debt:
At the end of 2012, the U.S. debt was $16.4 trillion, while GDP was $15.9 trillion. That made the debt-to-GDP ratio 103%, higher than at any time since World War II. Debt was driven by government spending and reduced revenue from taxes, thanks to slow economic growth. The FY 2012 budget deficit was $1.327 trillion. As a result, discussion on how to reduce the debt dominated the 2012 Presidential campaign. Afterwards, the debate continued as Republican House Speaker John Boehner and President Obama narrowly avoided the fiscal cliff.
Value of the Dollar:
The dollar declined in 2012. A euro was only worth $1.29 in the beginning of 2012, but could be exchanged for $1.32 by year's end. This helped exports, boosting economic growth a bit. It also hurt imports by making them more expensive. For more, see Value of the Dollar. (Article updated February 11, 2013)