U.S. outlook for 2012.

• Author: Witte, Willard E.

The United States economy in 2011 managed to underachieve even relative to our unambitious expectation. A year ago, we thought growth would come in close to 3 percent for the year--certainly not great for an economy coming out of a very deep recession. Instead, the economy has expanded at an annual rate of only 1.2 percent through three quarters (see Figure 1).

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The labor market has done even worse. We anticipated job growth would average very close to 200,000 per month in 2011. Through November the actual outcome has been just 132,000 jobs (see Figure 2). The difference means that unemployment has remained close to 9 percent, not the modest decline we had forecast.

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The blame for this dismal outcome is widely shared, but two items, one man-made and the other an act of God, top the list. The latter was the earthquake and tsunami that hit Japan in March. The disruption to supply chains had a temporary, but clearly negative, effect during the summer.

The man-made component is the inability of the political sector--both domestically and abroad--to make some tough decisions. At home, this has manifested itself as a series of deadline-driven crises that have all ended with a non-decision to delay any substantive action. The cumulative effect has been to ratchet up uncertainty and destroy what remains of household and business confidence that policy will shift from being mostly counterproductive to being a positive force for sustained recovery.

The global component is centered on Europe and its sovereign debt situation. As in the United States, leaders have taken half steps that are mostly designed to avoid the fundamental problem and to delay the point of real decision.

Looking to the future, these political problems seem unlikely to turn in a productive direction in the near term. As a result, we expect that 2012 will be generally similar to 2011: unacceptably slow growth, without much progress in the labor market. To be more specific:

* We expect output to grow between 2.5 and 3 percent on a fourth-quarter to Fourth-quarter basis. This will be better than 2011, due to somewhat improved household spending and less drag from the government sector.

* Employment will continue to increase, but only enough to allow marginal progress in reducing unemployment. By the end of 2012, unemployment will still be above 8 percent.

* Higher commodity prices raised inflation significantly in 2011. This situation has moderated...