The economy at midyear.

• Author: Sargen, Nicholas
• Position: Economy

The U.S. economy has experienced mixed results in the first half of 2012, with real gross domestic product (GDP) expanding at an estimated 2 percent annual rate, job growth disappointingly tailing off in April and May after a promising start and months of decline in the unemployment rate. The unemployment rate stood at 8.2 percent in May, down from 8.5 percent at the end of 2011. The U.S. stock market has generally improved on the strength of record-high corporate profits earlier this year.

But markets have turned more volatile lately, and many investors are unsure if the economy is headed for a self-sustaining expansion, following two consecutive years in which it has disappointed. Formidable obstacles still stand in the way, including a moribund housing sector, fragile business confidence and ongoing economic threats from Europe, the Middle East and China. On the political front, the 2012 elections are adding to worries about future tax and regulatory policies.

Amid these uncertainties, there is one thing investors can probably count on--namely, the Federal Reserve can be taken at its word about keeping interest rates unusually low for another one-to-two years. While a low-rate environment will help debtors service their obligations, it will at the same time pose challenges for savers and financial institutions that have sizable bond holdings.

U.S. Economy: A Respectable Start to 2012

Based on results for the first five months, the U.S. economy is in better shape today than it was a year ago, when it slowed unexpectedly. The pace of activity picked up in the fourth quarter of 2011 to a 3 percent annual rate, its strongest showing in more than a year. While GDP growth moderated to a 2 percent rate in the first quarter partly due to cutbacks in government spending, personal consumption--which represents more than 70 percent of all spending--grew at a 2.7 percent pace.

Policymakers and market participants, however, are uncertain whether the recent improvement will continue, as some of the decline in the unemployment rate stems from discouraged workers dropping out of the labor force. The more telling statistic is that 4.2 million jobs have been created since early 2010, mostly in services and health and education, after 8.8 million Americans lost their jobs during 2008 and 2009. There are approximately 1.2 million new entrants to the workforce on average each year.

One of the most encouraging developments is that the manufacturing sector, which has experienced sustained job losses over the past four decades, has become more competitive internationally. Indeed, there are a growing number of stories about U.S. companies...