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PETER CRABB: Expect more of the same in local, national economies in 2012

Despite Hall of Fame catcher Yogi Berra’s famous pronouncement that “it’s tough to make predictions, especially about the future,” economists are frequently asked to provide an outlook when a new year comes around.

Let’s speculate as to what’s in store for the nation and the Treasure Valley using the three key variables of macroeconomic analysis — income, prices and employment.

The nation’s income, or real gross domestic product, expanded 3 percent in 2010 after declines in both 2008 and 2009, but is set to finish the year with less than 2 percent growth. Meanwhile, prices are rising fast. The Consumer Price Index rose more than 3 percent for the year.

With slow income growth and inflation, unemployment across the country remains stubbornly high. The employment picture improved as 2011 drew to a close, but the unemployment rate at 8.6 percent remains well above the 5 percent level economists consider normal.

This is the economic picture for 2012: slow growth and high unemployment. There is simply not enough consumer and investment demand for firms to increase hiring and household incomes to rise.

U.S. households still have a debt-service ratio above what it was during the last big recession of the 1980s. Consumers may spend in 2012, but not at the rate they did this past decade.

Economic conditions outside the U.S. are also weak. The euro zone accounts for more than 20 percent of the world economy and has yet to deal with all the bad debts held in its banks. Emerging markets such as China and India are now putting the brakes on their economic expansions to combat inflation.

All these issues will hold back the U.S. economy.

Current financial market conditions reflect a high level of uncertainty. Investors are seeking the safety of U.S. government debt. The Standard & Poor’s 500 stock index was unchanged for 2011, but investors in U.S. Treasury debt were awarded stock-like returns. The price of the 10-year Treasury note rose 17 percent over the year.

The yield spread, or difference between the two and 10-year notes, is only 1.6 percent, indicating the market expects very low inflation ahead. But at these levels, bond investors will get an inflation-adjusted return over the next few years of near zero. Apparently, no return is better than taking any risk.

A quick macroeconomic analysis of the Treasure Valley provides a slightly better picture.

Personal income for the Boise-Nampa metropolitan area rose about 1.5 percent in 2010 after having fallen by 6 percent in 2008 and 2009. Preliminary reports for Idaho suggest the Treasure Valley saw income growth of 4 or 5 percent in 2011.

The unemployment rate for the area dropped from near 11 percent at the start of 2011 to only 8.4 percent recently. At 3.3 percent, the inflation rate for Western U.S. cities like Boise is near the national average.

Recent trends suggest a continuously improving, albeit slow, local economy in 2012. Housing starts in the Valley have been positive now for six months straight. Office vacancy rates are declining, and high agricultural prices are supporting farm incomes.

If consumer or investment demand does pick up, the Valley is in a good position. This area’s favorable labor costs and amenities provide a good place for business startups or those firms that want to relocate from high-cost states.

prcrabb@nnu.edu

PETER CRABB Professor of finance and economics at Northwest Nazarene University in Nampa

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