Economic Update - December 2012

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by Douglas L. Williams, President & CEO

December 12, 2012

The headlines and airwaves are filled with predictions of dire consequences of failure to avoid the fiscal cliff.  Most economic forecasters assume a quarter or two of GDP contraction, persistently high joblessness, and a financial market crisis.  Political commentators fear calamitous mid-term election damage to one party or another.  The more hopeful expectation is that calmer heads will prevail, and that after a bit of political theater played on the precipice of the cliff, an acceptable compromise will be developed to free the economy to a more orderly, if not robust, expansion.

Winston Churchill famously said, “You can always count on Americans to do the right thing – after they’ve tried everything else.”  It seems to me that we’ve tried everything else, and that the process will now yield a workable solution.  I believe we will avoid the crisis, but the resulting economic environment will be uninspiring.

High levels of public debt here and abroad will limit the ability of governments to intervene in the economy to stimulate demand.  Central banks will be compelled to keep interest rates artificially low to protect weak borrowers, particularly governments, and accommodative monetary policies will be ineffective in stimulating growth.  The economy is likely to grow at a pace well below the historic trend of 3%+.  Unemployment and underemployment levels will improve gradually, but will remain well above historic averages.  Higher tax rates will make it harder to accumulate wealth and build capital.

After three years of weak recovery, we should expect another two to three of the same.  The artificial limitations imposed on the economy by governments and central banks will prolong and subdue the necessary process of correcting the excesses of the past.

Breakout performance in business and financial markets will come to those who develop innovative products and services, creative business models, and targeted investment strategies.  In an era of more of the same, ingenuity will win.