The economic indicators, which have been pointing erratically upward for much of this year, moved decisively into positive territory in December, with the December employment report providing an encouraging exclamation point at year-end.

U.S. employers added 200,000 workers – an unexpectedly strong performance following a revised November gain that was smaller than originally calculated.  The unemployment rate fell to 8.5 percent, the lowest level since February, 2009 and claims for unemployment benefits declined for the third consecutive month in December, providing further evidence that the recovery may be gaining strength. 

“It really does look like the economy is beginning to change gears as the labor market is firming,” Joel Naroff, president of Naroff Economic Advisors Inc., noted in a report published before the Labor Department figures were announced.  “We started off 2011 with pretty solid job gains and that looks like it could be the case in 2012 as well.”

Other indicators also reflected a brightening outlook:

·         The Conference Board’s Consumer Confidence Index reached its highest level since April at 64.5 in December, nearing a post-recession peak.

·         Retailers reported “solid if not spectacular” holiday sales as consumers opened their wallets wider than analysts had expected. 

·         Factory orders increased by nearly 2 percent in November – the largest gain in four months, and the Institute for Supply Management’s manufacturing index (another measure of manufacturing strength) reached a six-month high in December.  

·         Small business borrowing activity jumped in November, pushing the Thomson Reuters/PayNet Small Business Lending Index to its highest reading since February 2008 and indicating “underlying strength in the economy that is not being reported elsewhere,” Bill Phelan, founder of PayNet, said of this report.   

·         The housing market remained problematic, but even here some of the statistics looked brighter. 

Existing home sales increased by 4 percent in November compared with the prior month, pushing sales totals 12 percent above the year-ago figure and helping  to dispel the cloud created when the National Association of Realtors’ revision of its data showed that average sales since 2007 were about 14 percent lower than originally calculated.  

n  Pending sales, an indicator of future home buying activity, increased by 7.3 percent in November, reaching the highest level in 19 months. 

n  New home sales increased by 1.6 percent to an annual rate of 315,000 units, a seven-month high and the third consecutive gain for this ailing sector.  Housing starts and permits also both recorded 18-month highs and builder confidence improved on those readings. 

“Falling home prices meeting already low interest rates are driving affordability,” Ellen Zentner, a senior U.S. economist at Nomura Securities International Inc., told the New York Times. “Mix that with higher consumer confidence and job growth, and I can see why home sales appear to be lifting off the bottom.”

Mark Vitner, senior economist at Wells Fargo Securities, also viewed the housing reports positively, if a bit less enthusiastically.  “All of the housing numbers have looked a lot better recently,” he told Bloomberg News.  “Things aren’t getting any worse now,” he added, “and that’s an improvement.”

Although much of the year-end data seem to suggest strongly, if not conclusively, that the economy is strengthening, forecasts for this year remain mixed, with optimists concluding that  the recovery is sustainable, but pessimists not convinced.,  Following, a sampling of  predictions culled from a variety of economic crystal balls. 

Barry Eichengreen, professor of economics at the University of California, Berkeley, predicts “a year of muddling through.  If all of the global economy’s largest pieces fall into place, there is no reason why 2012 should be a disaster,” he believes, but he also warns that “muddling through cannot continue forever.”

Nigel Gault, senior economist at IHS Global Insight, shares the widely held view that 2012 may look a lot like 2011 but with a significant risk that the Eurozone crisis will wreak havoc on the U.S. economy.  "The Eurozone is the single biggest threat, not just from a Eurozone recession. It's from the risk of recession combined with a Eurozone financial crisis that develops into a major global financial crisis. In the worst case, it could be as bad as we saw in 2008, 2009," he fears.

Gary Shilling, an economist noted for his gloomy forecasts, sees little reason for optimism this year.  “Slow economic growth and high unemployment [will] persist,” he predicts, and “it wouldn’t take much of a shock to push growth into negative territory.” That push could come, he says, from a “sizable” decline in home prices, or from “the spreading effects of the European financial crisis….This won’t be another Great Recession,” he says, but it also won’t be the rebound that some other analysts are expecting.

Greg Ip, U.S. economics editor for the Economist, doesn’t think the risks of another recession are “extraordinarily high,” largely, he told ABC News, because “the parts of the economy that normally push us into a recession such as housing, automobile sales and business inventories, [are] all actually still quite depressed….They never actually recovered much from their recessionary levels.”, he explains, because “the parts of see much risk of another recession, largely because

Mark Zandi, senior economist of Moody’s Analytics, expects the economy to perform “a bit better” this year than last. "The Europeans are fighting to keep the euro area together, while U.S. policymakers are struggling to find an appropriate degree of fiscal austerity,” he explained in a Wall Street Journal opinion piece. “While we believe these issues will be resolved in a reasonable way,” he acknowledged, “there is a significant degree of uncertainty associated with this assumption."

Robert Johnson, director of economic analysis for Morningstar, agrees that the outlook is a big clouded as “uncertain risks out of Europe still loom.”  But on balance, he thinks “the odds of an economic upside surprise (are substantially higher than a downside surprise.”  The most likely drivers of an “upsize” surprise:  “increased U.S oil production, a sharper rebound in auto production and aircraft production, and a stronger housing market.” 

HOUSING MARKET OUTLOOK

Robert Johnson at Morningstar predicts that housing “for once is going to be a positive for the economy…I’m not calling for a boom, mind you,” he emphasized in a recent commentary.  “But I would be shocked if housing starts in 2012 aren’t meaningfully ahead of those in 2011.”

Frank Nothaft, vice president and chief economist for Freddie Mac, predicts “another bumpy ride” for housing this year, with both the housing market and the economy as a whole “gaining ground” but slowly.  His considerably less upbeat counterparts at Fannie Mae are even less upbeat.  They expect the housing market will remain “subdued” next year, dampened by the country’s ongoing fiscal problems, the “very large” fiscal impact of pending tax and legislative decisions, and most of all by the continuing Eurozone debt crisis, which Fannie’s economists think “may be worse than meets the eye.”

Lawrence Yun, chief economist for the National Association of Realtors, thinks a significant improvement is possible next year.  “With housing inventory down significantly in 2011, home prices could easily turn up in 2012," he says. Even a “very modest” appreciation rate of 3 percent to 5 percent, he notes, would increase home values overall by from $500 billion to $900 billion. "If a very modest 3 to 5% price gain, then housing valuation would rise by $500 to $900 billion."

Stan Humphries, senior economist for Zillow. com, isn’t holding his breath for any near-term home price gains.  "[T]he unabsorbed pool of housing supply, dragging levels of consumer confidence, high unemployment and negative equity will continue to put downward pressure on the housing market, pushing our expectation for a potential recovery into late 2012 or early 2013," he notes in a recent report. 

Economists polled by MarketWatch similarly expect housing to remain “the problem child,” impeding the overall economic recovery.  “With the foreclosure pipeline full and 10.7 million Americans (22 percent of those with mortgages) still under water on their loans, it's hard to see a meaningful change in the short term…. Given that house prices doubled between the seven years from 2000-2006, many economists believe that it could take that same amount of time for us to have a full recovery - in other words, it might be 2013 or 2014 before we return to a more normal housing market,” the MarketWatch report concludes.

David Blitzer, chairman of the standard& Poor’s Index Committee, also lines up on the negative side of housing forecasts, pointing to the October S&P/Case-Shiller index home price reading, which was weaker than anticipated.  That  bad news was offset somewhat by stronger than expected home sales reports, leading Blitzer to predict that housing will be “bumping along the bottom” for most of this year.  He doesn’t anticipate a   rebound, yet, but neither does he see any evidence that “[we are] getting ready for a big plunge.”

Economists polled by MarketWatch similarly expect housing to remain “the problem child,” impeding the overall economic recovery.  “With the foreclosure pipeline full and 10.7 million Americans (22 percent of those with mortgages) still under water on their loans, it's hard to see a meaningful change in the short term…. Given that house prices doubled between the seven years from 2000-2006, many economists believe that it could take that same amount of time for us to have a full recovery - in other words, it might be 2013 or 2014 before we return to a more normal housing market,” the MarketWatch analysis concludes.

Mark Vitner, senior economist at Wells Fargo Securities, agrees that a strong housing recovery remains a distant hope.  “It is hard to see the housing market doing better until the massive headwind of foreclosures is removed and that will likely take a couple of years," he notes in a recent note to investors.  "It is not that I am pessimistic about the housing market,” he adds.  “It is just that I am not optimistic.”  He thinks it will be 2013 or 2014 before even a “gradual recovery” begins, “with a full normalization not until 2015."  

Lance Roberts, CEO and chief strategist at Streettalk Advisors, also sees little near-term prospects for a housing recovery.  “Despite rumors to the contrary, real estate will continue to struggle not only in 2012 but well beyond,” he predicts in his economic forecast. “The bursting of the real estate/mortgage bubble is not something that is solved in the course of a couple of years,” he explains, “especially in a case where the excesses took two decades to accumulate.” 

As always, the best way to evaluate disparate economic forecasts is to pick one that confirms what you want to believe and ignore the rest.  Wherever you find yourself leaning on these predictions, it is probably worth noting a point made by Lawrence Weinman, an investment advisor who points out in his blog, “Most of the forecasts for 2011 issued around this time last year proved terribly wrong.”