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Johnson: Don't Let an Economic Soft Patch Petrify You

Jason Stipp

Jason Stipp: I'm Jason Stipp from Morningstar. After a relatively robust fourth quarter for the economy, what can we expect for 2012? Morningstar's Bob Johnson, director of economic analysis is here to help us dig into the details and tell us not to worry too much if we see some soft spots in the early part of the year.

Thanks for joining me, Bob.

Bob Johnson: Great to be here.

Stipp: So before we talk about 2012, I want to talk about the fourth quarter of 2011. It looks like it's going to be relatively robust, when all the numbers and revisions come in. Why is that? What did we do well at the end of the year?

Johnson: I think, it's quite a big number. I mean, I think, we'll grow 3% or more in the fourth quarter, and that's almost the double the best rate so far in the year. So that was a very good quarter. We closed on a strong note. A few things happened. One is that the auto industry kind of restarted, and we got a full quarter of all that production coming back online. So, that's certainly one thing that helped out there.

Stipp:  This was after all of the disruptions that we saw through the spring and the summer because of the tsunami.

Johnson: Absolutely, they had to wait, cycle back their production, and then they had to ramp it back up in the third and fourth quarter, and the fourth quarter is the first full quarter we got of that. So that was certainly a big help.

Stipp:  So, autos won. What else helped us in the fourth quarter?

Johnson: Well, the consumers certainly spent in the fourth quarter. They kind of accelerated their spending a little bit and spent actually more than they had. The savings rate went down in the fourth quarter, I estimate, and certainly as deals became attractive and prices came down and as there were things like autos that they just had to replace, the consumption number went up in the fourth quarter, and that was certainly a help.

Stipp:  So, the fourth quarter, it looks like it's going to be pretty good. But you're saying now as we move into the new year, the first quarter of 2012, we could see some softness there. What do you think would be behind that? Why might we see a bit of a pullback from those numbers?

Johnson: Again, to put it in some perspective, if we grew 3% or 3.5% somewhere in that range in the fourth quarter, we could dip down all the way to 2% in the first quarter again, and it always starts fears, 'oh, we're falling back in', 'it's another recession', 'here we go again'. But, I think, there's a lot of special factors. In the first quarter, obviously right now we've had a stretch of really warm weather, and that begins to affect utility usage, winter sports, and winter clothing. And so while the warm weather kind of helped us at the end of last year, because people could get out, they could go shopping, construct buildings longer than they could, now we are going to get a little bit of payback. The warm weather is actually going to be a little bit of a hurt in here. So, that's one thing.

Stipp: You mentioned that the consumer might have done a little bit of extra spending in the fourth quarter, maybe they pulled ahead some of that spending you might have seen in the first quarter?

Johnson: Absolutely. The consumer clearly did spend ahead with the savings rate coming down. Now maybe they anticipated inflation coming down; maybe they were looking forward to the Social Security check increases in the first quarter. Who knows what it was, but they did spend more than their incomes went up, at least what we've seen so far, and now as we move into this year, I think, they may pull back a little bit. And you saw in a whole variety of numbers that the consumers really did kind of pull out all the stops in the fourth quarter. But the consumer credit number, a number that's been kind of dismal--they haven't borrowed any more, they haven't had any confidence to go out and borrow—showed best borrowing month in November of the recovery. They borrowed some $20 billion. So, they are clearly feeling like in the mood to spend again.

Stipp: So, consumers are spending down a little bit of savings and taking out a little bit more credit on those credit cards to do a little bit of shopping. We could see that soften a bit here in the first part of the year.

Johnson: Yeah.

Stipp: What about employment, would we see any softening there, after we had a pretty good December labor report?

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Johnson: Yeah. Not only December, but we really had a pretty good last half of the year in terms of employment, and I think, especially in December the rollout of nice helpful one-time things. I think, retail decided to compete at least partially on hours this time around, so retailers hired a few more people than normal this holiday season, and obviously those people are probably going to be gone in January.

There's some seasonal adjustment that's made for that, but I think it's going to be bigger than the seasonal adjustment this time around. There was a big jump in delivery personnel. All the Amazon stuff getting delivered last year. I think that starts to go away in January and February. So again, it was something that wasn't fully captured.

We probably weren't really as good as the 200,000 we saw in December. So, we could see a number--I don't think it will be quite this bad--but we could see unemployment numbers back down to 100,000 or so in January. And again, this is not a reason to panic as long as you didn't get too excited about the December number.

Stipp: So when you say don't panic about some of the softness that we may see here, that implies to me that you expect some continued growth throughout 2012 as you look beyond that first quarter then. What do you for the economy?

Johnson: Yes. Overall for the year ahead, I'm looking for 2%-2.5% gross domestic product growth, and that's adjusted for inflation. And then if you look back at last year at 2011, we grew about 1.8%. So, there's some acceleration, but not massive. And again this year it's going to be more about the consumer. I don't think you're going to have as big an export pop as we've had in the past, and I don't think even business spending will maybe be quite as robust as it was in 2011.

But on the other hand, I think, on the investments side that housing maybe do just a little bit better, and so that's how I get to that kind of better number, a better consumer, a little better housing, and a little bit better construction in general. And that's where am at.

Stipp: But as with any forecast, there are always wild cards in there. What's on your worry list that you wake up at night and say, 'ooh, is that going to blow up?'

Johnson: Yeah. The one that really worries me always is inflation in general and commodity prices in particular. I would have thought given some the weakness we had seen in Europe and some talk of slowing in China that we would've seen oil prices down a little bit more than they have been in, and clearly one of the things that helped the Christmas season, the holiday season along this time was gas prices fell at just the right time. And I think that was a big help to the consumers' pocketbooks in the month of December. So, I think, now that gas prices have popped right back up again at the beginning of the year, that's not a good thing for consumers

And there's kind of a magic number there. Keep in mind, if inflation gets at a 4% year-over-year rate, that's the point that cuts off economic recoveries. Inflation is the number-one stopper of recoveries. And if that number gets up over 4%, I'm worried. I already have got oil as a problem. Some of the cold weather that's down in Florida--I've talked about mainly warm weather--but there has been some Florida issues and some issues at Brazil that both may look like some of commodities prices may go up a little bit, such as orange juice related to Florida and some of the other crops down in Brazil, as well. So, unfortunately, there are some little worrisome signs that maybe there is a little bit more inflation creeping back in again, which worries me.

Stipp: So inflation is a very important one to keep on your radar screen as a potential risk. What about Europe?

Johnson: Yeah. Europe is always a worry. Now, again, I've always said it's only 3% of our GDP, but I am worried about Europe. It started to creep into a few different company numbers that we've seen. We've talked about luxury goods guys doing really well, and obviously Nordstrom, Saks, and the companies that are U.S. luxury-dependent did do well. But Tiffany for the latest quarter was a little bit soft, and certainly didn't help that China and Europe are both feeling a little bit softer and those are key markets for the company. So, that's certainly something to worry about, as some of the slowing in Europe. I think, we could have a negative quarter of growth in Europe coming up.

Stipp: So, you mentioned China. A slowdown there is on a lot of people's worry list. How big is that on your worry list?

Johnson: Well, again, it's even smaller than Europe on our list, but it certainly could affect individual companies in a very big way. China has been kind of relatively consistent 10% grower and now we are thinking more like 6%- 8% type of growth. As the country grows slower, hopefully that will help some of our commodity prices. The thing that I mentioned I was worried about earlier. So, I'm not as worried as some are about China, but clearly it is on a lot of people's minds and on the market's mind. So, that's something for the radar.

Stipp: All right, Bob. So it sounds like you've put out a caution sign for maybe some softness in the first quarter, but definitely not a panic sign. You see some brighter, in fact accelerated growth for the rest of the 2012. So, thanks for joining us and giving us that update today.

Johnson: Thank you.

Stipp: From Morningstar, I'm Jason Stipp. Thanks for watching.