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Outlook for the Economy

The odds of an economic upside surprise in 2012 are substantially higher than a downside surprise, though uncertain risks out of Europe still loom.

Robert Johnson, CFA, 12/27/2011

--After smoothing out bumpy GDP results, the economy is probably growing at about 2%.

--Potential sources of an upside surprise include increased U.S. oil production, a sharper rebound in auto production and aircraft production (Boeing), and a stronger housing market.

--Though corporations continue to remain cautious, consumers have continued to spend.

The U.S. economy grew in 2011, but at a slower rate than I had hoped when the year began. I had predicted that the economy might grow as fast as 3.0% to 4.0% when the year started, and it now looks as if the economy will turn in a more modest 2% or so growth rate on a fourth-quarter-to-fourth-quarter basis.

Even more surprising than the overall growth rate was the pattern of that growth rate throughout the year. Growth plunged to 0.4% in the first quarter and accelerated throughout the year with the fourth quarter now likely to produce annualized growth well in excess of 3%.

A combination of poor weather, a shocking jump in oil and gas prices due to political unrest in the Middle East, and supply-chain disruptions related to the Japanese tsunami all contributed to the pitiful level of economic growth in the first half. As those factors reversed themselves in the second half, economic growth spiked. When the first half and second half are combined, I think the overall 2% growth rate is more representative of the state of the U.S. economy than the first half doldrums or the second half spurt.

Although the overall GDP for 2011 was below my forecasts, given all the first-half shocks, followed by more severe sovereign debt issues in the second half, I am not that disappointed with the U.S. economic performance. I may have started the year too bullish, but I didn't cave into the chorus of economists who were overly focused on manufacturing data and calling for another recession late this summer. Instead I remained focused on the U.S. consumer, which continued to power ahead throughout 2011.

More Upsides Than Downsides (Though the Downside Is Scary)
My overall forecast for 2012 is for slightly higher growth than the consensus, but not by a lot. However, I think the odds of an upside surprise are substantially higher than a downside surprise. Potential sources of an upside surprise include increased U.S. oil production, a sharper rebound in auto production and aircraft production ( Boeing BA), and a stronger housing market.

Robert Johnson, CFA, is director of economic analysis with Morningstar.

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