Waves of Uncertainty

For every encouraging unemployment, housing or retail-sales report that came out in 2011, the following week or month brought equally discouraging news: Gas and food prices spiked, the stock market seesawed violently, housing and job markets stayed in the dumps. The economy technically emerged from the recession in July 2009, but it didn’t feel like that in 2011.

What are the implications for 2012? Unfortunately, you should expect more of the same conditions this year.

Experts with whom we spoke don’t agree on whether the economy will muddle along at a low growth rate or slip back into recession. And although the rate of inflation slowed, experts disagree on whether that will continue in 2012.

But that doesn’t mean that everything’s pitch black. Federal Reserve Board remains committed to reassuring markets that it won’t make any abrupt changes in its interest-rate policies for the next 2 years at least. This means that if you have top-notch credit, you will continue to find rock-bottom auto, home-equity and mortgage loan rates this year. But low interest rates also mean that the value of your home will languish and you’ll have to turn to the stock market to boost your assets in 2012. That brings its own challenges, because stock-market volatility is likely to persist. A few strategies and sectors should let you develop your stock portfolio, albeit by incurring some risk.

GROW OR NO? Like the Weebles kids’ toy, the U.S. economy has been wobbling but hasn’t fallen down. Economists are divided about whether that will continue this year.

After a recession, hopes are always high that the economy will bounce back quickly and return to an economic growth rate that will sustain job creation. Typically, that means a growth rate of the gross domestic product (GDP)—the total value of goods and services that are produced in the United States annually—of at least 3 percent. But in this environment of businesses and consumers who are committed to massive deleveraging—paying down of debt—that kind of growth isn’t possible, says David Levy, who is chief economist of Jerome Levy Forecasting Center, which is an economics forecasting firm. For 2012 and possibly 2013, businesses, consumers and the government will be reluctant to spend.

“The issue isn’t that interest rates are too high; it’s that people don’t have the confidence to participate in the economy,” says Thomas Fox of Cambridge Credit Counseling. The same goes for businesses, and that reluctance means that stock investors shouldn’t expect significant growth this year.

Interest rates are at historic lows and are predicted to stay low in 2012. Levy repeatedly cut his forecast for the 10-year Treasury note, which he now believes will hit 1.5 percent in 2012. That means that people who are bent on saving will be out of luck when it comes to finding low-risk certificates of deposit and Treasury notes (read: investments that don’t involve the stock market) that have returns that will outpace the rate of inflation.

Because the economy was stuck in neutral for the second half of 2011, economists cut their 2012 GDP projections further. For instance, economists who participated in the Blue-Chip Survey, which has polled top business economists since 1976 about the economy, as well as economists at International Monetary Fund (IMF) now peg 2012 U.S. economic growth at 2 percent.

Other experts, however, predict a recession, including Economic Cycle Research Institution, which has a strong track record of predicting economic growth. Federal Reserve Bank of San Francisco, in an economic report last November, put the chance of recession at 50-50 through the first half of the year and diminishing as we head into 2013.