The U.S. economy is gaining momentum and should push through next year with only a few bruises despite an almost certain European recession and slower global growth.
A firming in the anemic U.S. labor market should put the economy in reasonable shape to withstand headwinds from overseas, although the recovery will likely slow at the start of the year after a surprisingly solid fourth quarter.
"The U.S. economy will be one of the better stories in an otherwise gloomy global economy next year," said Sung Won Sohn, an economics professor at California State University in the Channel Islands. "It will not go into recession."
Data from employment to manufacturing imply U.S. growth will top a 3 percent annual rate in the fourth quarter, which would be the fastest pace in 18 months.
Much of that expansion reflects the release of pent-up demand for autos and a restocking of inventories by businesses, temporary factors that could lead to a lull early in 2012.
But a healing labor market provides a signal of a more-lasting and fundamental strengthening of the recovery.
The jobless rate fell to a 2-1/2 year low of 8.6 percent in November and first-time claims for jobless benefits have dropped to the lowest level since early 2008.
That's good news for the consumers who drive two-thirds of U.S. economic activity.
"The consumer is going to be able to spend simply because job growth is picking up," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania. "As job growth picks up, income picks up."
RECOILING FROM EUROPE
Many economists now look for growth of between 2.3 percent and 3 percent in 2012, even given the clouds overseas.
While far from stellar, that would mark an acceleration from an expected 2 percent expansion this year and it could offer some mild relief to President Barack Obama, whose handling of the economy is key to his re-election hopes.
The debt crisis in Europe and bickering over budget policy in Washington are the biggest threats.
"The key question is whether the economy will be allowed to run on its own internal dynamics," said Anthony Karydakis, chief economist at Commerzbank in New York.
A political stand-off over extending an expiring payroll tax cut and benefits for the long-term unemployed had raised the risk a fiscal brake would abruptly slow the economy at the start of the new year.
However, lawmakers on Thursday announced an agreement to continue the provisions for two months, setting up a decisive vote in the House of Representatives on Friday.
The action looks set to push the political brinkmanship into February, offering a temporary reprieve for the economy. Analysts warned that a failure to renew the measures could chop up to 1.5 percentage points off growth, raising recession risks.
As for Europe, economists expect just a mild downturn. A deep one could push up the value of the dollar and put a big pinch on exports.
As it is, a slower global expansion is already likely to take the shine off exports, though they account for only about 13 percent of U.S. gross domestic product. The euro zone's share of that slice is about 13 percent.
"Even assuming an incredibly dire scenario where import growth in the euro zone tumbled by 10 percent, the impact on U.S. GDP growth would be negligible," said Michelle Girard, a senior economist at RBS in Stamford, Connecticut.
For U.S. multinational manufacturers like General Electric Co and Emerson Electric Co, Europe is the biggest worry and they are already reducing their footprints on the continent.
"The reality (is) that Europe is in a recession and could be in a recession for most of 2012," said Emerson Chief Executive Dave Farr. In contrast, the St. Louis-based company said it sees healthy U.S. demand.
Concerns over Europe have also led financial analysts to scale back profit expectations.
Earnings for firms in the Standard & Poor's 500 index are seen growing 5.8 percent in the first quarter of the next year, down sharply from a forecast of more than 10 percent in October and much slower than the 18 percent growth logged in the third quarter, according to Thomson Reuters Proprietary Research.
FINANCIAL MARKETS MELTDOWN
The gravest European threat lies outside of exports and in the financial sector. But most economists do not believe the euro zone debt crisis will spark a crisis in the United States.
"If you stabilize the financial sector and you don't have the kind of financial crisis we had in 2008, why do we have to have the economy we had in 2009?" asked Naroff.
With the U.S. economy poised for steady growth, many analysts have set aside earlier expectations that the Federal Reserve will launch a further round of asset purchases.
"I think they will be on hold for a while, unless something happens in Europe and signs of a slowdown in the U.S. emerge again," said Adolfo Laurenti, deputy chief economist, Mesirow Financial in Chicago.
Of course, not everyone is so sanguine. For example PIMCO, the home of the world's largest bond fund, expects growth no better than 1 percent and perhaps no expansion at all.
But there are signs of life even in the depressed U.S. housing market, where building could contribute to growth for the first time since 2005.
In addition, state and local government revenues are starting to trend higher, which should allow them to spend a bit after a long period of belt-tightening.
Business spending could soften somewhat, although analysts do not expect a sharp pull back given that corporations are sitting on about $2 trillion in cash.
"With that amount of liquidity, you would expect some contribution to growth from continued capital spending," said Commerzbank's Karydakis.
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