The biggest contributor was the 2012 presidential election. It was a very close race between two candidates with radically different approaches to stimulating economic growth. The race itself slowed growth, as businesses waited to see what direction the country would take. The second-largest contributor was from the ever-pending fiscal cliff. Uncertainty over future tax rates kept $1 trillion of corporate expenditures on the sidelines, waiting for a resolution before it could be safely invested. In the first half of the year, many businesses were waiting to see whether Obamacare would be shot down by the Supreme Court on June 28, 2012. It wasn’t, but this uncertainty slowed business expansion in the first half of 2012. The Eurozone debt crisis also wreaked havoc with the U.S. stock market. Many people were not sure whether the European Central Bank, would prevent Greece, Spain, and Italy from defaulting on their debt. This uncertainty sent the Dow down 1,000 points in May. On a lighter note, some investors were waiting to see if the world would end on December 21, 2012. Many believed the Mayan Calendar predicted doomsday’s specific date. Fortunately, it didn’t happen.
With All This Uncertainty, Why Did the Economy Keep Growing?
First, the Federal Reserve kept feeding it fuel in the form of more monetary stimulus. The Fed relied on various forms of quantitative easing, announcing QE3 in September, and QE 4 in December 2012. This kept interest rates low. Second, foreclosures started to abate after federal courts settled with banks over the robo-signing accusations. As a result, the housing market improved. Third, consumers waded through their debt and resumed shopping. This was despite a lower credit card use. But the Fed monetary stimulus resulted in lower consumer lending rates. This allowed people to take on auto, furniture, and education loans.
Economic Growth and GDP
Economic growth, as measured by gross domestic product, grew 3.3% in the first quarter of 2012. It then dropped slightly to 1.8% in the second quarter. It was a tepid 0.7% in the third quarter and 0.4% in the fourth. Most of these variations were due to changes in government contracts with defense. These can be volatile because they are large contracts. The third and fourth quarters’ weakness was probably in response to the threat of sequestration. It eventually cut some government programs by as much as 10%. The nation’s total economic output as measured by GDP was $16.3 trillion. Nevertheless, the economy ended the year with a 2.2% growth rate. That was within the 2% to 3% healthy GDP growth range. But there were far too many people still unemployed from the 2008 financial crisis. Economic growth needed to be at least 3% to 4% for a while to absorb all these workers. What the current GDP growth rate can indicate is the health of the economy. It’s always good to be aware of it when making major financial decisions. The graph below shows the GDP growth rate in 2012, and how the drop correlated with the presidential election.
Employment and Unemployment
In 2012, the economy created 2.43 million jobs, as employment rose from 140.9 million in December 2011 to 143.33 million in December 2012. This was enough to absorb new workers to the labor force, but not enough to put a substantial dent in the unemployment rate. The unemployment picture did improve though, as the rate dropped from 8.5% to 7.9%. The number of unemployed fell from 13.09 million to 12.3 million. The Bureau of Labor Statistics provides monthly and yearly reports showing employment statistics and unemployment statistics.
Retail Sales and Credit
Retail sales were $4.82 trillion in 2012, a healthy 4.8% rise. Yet this was lower than the 7.3% increase realized in 2011. Most of this gain was from an increase in gas prices. These are included and not adjusted for price changes in the U.S. Census figures. It also reflected gains in auto sales, as well as new records in Black Friday and Halloween holiday sales. The retail sales statistics, published by the U.S. Census Bureau, shows a monthly and yearly measurement of the retail industry. Much of this retail sales growth was fueled by consumer debt. Americans took advantage of 200-year low-interest rates to take out loans. By December, they owed $2.07 trillion in non-revolving debt. Credit card debt also rose, as banks grew less afraid of making bad loans. Americans owed $840.17 billion in revolving debt. All told, consumer debt was $2.91 trillion. This was more than before the financial crisis, although it was a healthier ratio since it had a higher percentage of fixed-interest, low-cost loans, and a lower amount of credit card debt. The Federal Reserve makes monthly and annual reports on consumer debt statistics.
Inflation, Oil and Gas Prices, and Interest Rates
Fortunately, inflation wasn’t a threat in 2012. The Federal Reserve kept interest rates at the lowest level in two centuries to stimulate economic growth. The fed funds rate remained near zero. The nation’s central bank promised to keep it that way until the unemployment rate hit its target of 6.5%. In addition, the Fed continued to buy sub-prime mortgages and U.S. Treasuries, a program known as quantitative easing. Despite this boost in liquidity, prices only rose 1.7% during the year. The core inflation rate was slightly higher, at 1.9%, but still below the Fed’s target of 2 percent. The current inflation rate can serve as an indicator of how fast price changes are and where the economy currently stands in the business cycle. To the annoyance of consumers, oil and gas prices, unfortunately, spiked up in the spring. The national average gas price was $3.96 in April, before dropping back a bit in May. But distribution shortages in California pushed the price there to almost $4.50 in the fall.
Budget, Deficit, and Debt
At the end of 2012, the U.S. debt was $16.05 trillion. That made the debt-to-GDP ratio 100%, higher than at any time since World War II. Debt was driven by government spending and reduced revenue from taxes, thanks to slow economic growth. The Fiscal Year 2012 budget deficit was $1.077 trillion. As a result, discussion on how to reduce the debt dominated the 2012 presidential campaign. Afterward, the debate continued as Republican House Speaker John Boehner and President Obama narrowly avoided the fiscal cliff.
Value of the Dollar
The dollar declined in 2012. A euro was only worth $1.29 at the beginning of 2012. But it could be exchanged for $1.32 by year’s end. This helped exports, boosting economic growth a bit. It also hurt imports by making them more expensive. Three things determine the value of the dollar: its exchange rate, Treasury notes, and foreign exchange reserves.
