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Tea Leaf: Economic outlook for '12

Published: Tuesday, Nov. 29 2011 2:25 p.m. MST

U.S. inflation

Consumer prices are expected to rise roughly 3.5 percent during 2011, with a slightly lesser rise the consensus view for 2012. Weak global economic growth could lead oil prices lower, a key element in that forecast. Over a longer time horizon, the debate continues between those expecting higher U.S. inflation and those seeing a Japan-style deflation in the U.S.

The Federal Reserve

The Fed's most critical interest rate — the federal funds rate — has been at an all-time low target level of zero percent to 0.25 percent since December 2008. Moreover, the Fed's Open Market Committee has stated it expects this rate to remain unchanged until at least mid-2013.

In addition, the Fed has tripled the size of its balance sheet by buying massive amounts of U.S. Treasury securities and mortgage-backed securities. The intent? To drive long-term interest rates lower. While such actions have been largely successful, weak home prices across the nation, high unemployment and a more paper-intensive lending industry — negatively affected by the Dodd-Frank financial legislation — has not led to a strong surge in mortgage refinance activity.

Housing, mortgage rates

Most forecasting economists see national home prices stabilizing by mid-year 2012, with very modest price appreciation to follow. At the same time, conventional 30-year fixed-rate mortgages have been at a 60-year low near 4.0 percent in recent weeks.

One could make a case to delay a home purchase for six to 12 months, but mortgage rates could rise enough to offset any slightly lower home price. Now may be an outstanding time to purchase a new or foreclosed property and to refinance a mortgage.

Global keys

Chinese and Indian economic growth are likely to slow somewhat, while Japan struggles with very substandard performance. High oil prices have boosted oil producing nations at the expense of user nations. The Canadian economy has slowed, while Mexico and Brazil are doing well.

However, these days it's all about a fragile European economy. Greece, Ireland, and Portugal have already been bailed out, while major anxiety about Spain and Italy exists. Even the French have seen borrowing costs rise as questions about that economy have surfaced. A possible French downgrade from its current triple-A status could send additional shock waves across Europe.

The Germans and the International Monetary Fund will face rising pressure to stem European debt contagion, even as affected nations face the real need to get spending and debt issuance under control. No other issue is more critical to global economic performance in 2012 than a solid resolution of the European debt crisis.

Jeff Thredgold is the chief economist for Zions Bank and founder of Thredgold Economic Associates, a professional speaking and economic consulting firm. Visit www.thredgold.com.

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