U.S. Growth May Accelerate as Europe Shrinks

By Bob Willis and Timothy R. Homan - Dec 31, 2011 4:55 AM GMT+0700

Rising confidence, fewer firings and gains in holiday sales show the U.S. economy is picking up, defying a slowdown in Europe and much of the rest of the world.

The divergence will become even starker in 2012 as the world’s largest economy accelerates, the 17-member euro area sinks into a recession and growth in emerging markets cools, according to economists like Maury Harris of UBS Securities LLC and Barclays Capital Inc.’s Dean Maki.

“There is a sense of decoupling,” said Harris, chief economist at UBS Securities in New York, whose team was the most accurate in forecasting the U.S. economy in the two years through September. “We can still have a decent year here in the U.S. even with the rest of the world slowing down.”

An improving job market and freer credit may underpin American household sentiment and spending just as the debt crisis in Europe prompts additional belt-tightening overseas. Stabilization in housing will erase a source of weakness at the same time vehicle replacement demand benefits companies like General Motors Co. (GM)

Stocks fell on concern over Spain’s budget deficit. The Standard & Poor’s 500 Index dropped 0.4 percent to 1,257.6 at the close in New York. The benchmark equity gauge was little changed this year.

Investors have been less kind to European equities. The Stoxx Europe 600 Index dropped almost 12 percent in 2011 as the debt crisis spread across the major economies of the euro area.

China and U.K.

Among reports today, manufacturing in China contracted in December for a second month as Europe’s debt crisis slowed export demand. The euro area’s crisis is crimping housing and growth in the U.K. as well, with the average cost of a home dropping 0.2 percent in December, the first monthly decline since August, the Swindon, England-based Nationwide Building Society said in an e-mail.

The extension of a tax cut through February is one reason economists are turning more optimistic on U.S. prospects. The economy will grow 2.5 percent in 2012, up from a prior estimate of 1.9 percent, according to a revised forecast issued on Dec. 23 by Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. The new estimate was based on the assumption that lawmakers will agree to retain the tax break for all of next year, he said in a research note.

JPMorgan projects the combined economies of the countries in the euro area will shrink 0.7 percent next year.

Fewer Jobless Claims

Another reason for optimism is a decrease in firings by U.S. companies that may portend a pickup in hiring in early 2012. Fewer Americans filed applications for jobless benefits in the four weeks through Dec. 24 than at any time since June 2008, according to figures yesterday from the Labor Department.

Less joblessness, rebounding stocks and falling gasoline prices are helping boost confidence. The Bloomberg Consumer Comfort Index reached a five-month high in December.

“We can tell that something is clicking if jobless claims are down and confidence is up,” said UBS’s Harris, who projects the U.S. economy will grow 2.1 percent in 2012.

Maki, chief U.S. economist at Barclays Capital in New York, forecasts 2.5 percent growth next year, up from 1.7 percent in 2011. The euro region will contract 0.2 percent after expanding 1.5 percent, he said.

Europe a ‘Headwind’

“We are diverging significantly as we move into 2012,” Maki said. “Europe is a headwind for the U.S., but we don’t think a European recession necessarily drags the U.S. into a recession.”

One reason is that consumer spending, which accounts for about 70 percent of the economy, has held up this year even as confidence slumped amid growing concern about Europe, the threat of a government shutdown during the mid-year debate on the U.S. debt limit and the downgrade of U.S. Treasury securities by S&P, Maki said.

Housing and auto sales, two areas which slumped during the recession, will probably improve.

Economists at Toronto-based BMO Capital Markets, led by Sherry Cooper, forecasts U.S. home construction will add to gross domestic product in 2012, led by the building of apartments and townhouses. Residential construction detracted from growth from 2006 through 2010 and was little changed this year.

The auto industry will strengthen as Americans replace aging and scrapped vehicles after delaying purchases since the recession, according to economists at Nomura Securities International Inc. in New York. For the number of cars per adult to hold at current levels, sales will need to climb to about a 16 million annual rate in coming years, the group led by Lewis Alexander wrote in a Dec. 5 report.

Auto Sales

Vehicle sales ran at a seasonally adjusted annual rate of 13.6 million in November, according to Autodata Corp.

“We’re encouraged by the industry’s recent performance and the developments that we’ve seen in the economy,” Don Johnson, GM’s vice president for U.S. sales, said on a conference call this month.

The U.S. economy’s ability to weather the mid-year slump in equities and confidence means it will overcome a European slowdown next year, said Vincent Reinhart, chief U.S. economist at Morgan Stanley in New York.

“The most important source of contagion is through financial markets, and we have already felt that,” said Reinhart. Morgan Stanley projects the U.S. will grow 2.2 percent in 2012 while the euro countries shrink 0.2 percent.

“There is a recession in Europe right now, but we aren’t forecasting a full-blown crisis and the euro hangs together,” Reinhart said. “Conditional on that, then the U.S. gets by.”

To contact the reporters on this story: Bob Willis in Washington at bwillis@bloomberg.net; Timothy R. Homan in Washington at thoman1@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz in Washington at cwellisz@bloomberg.net