Last week we talked about the many varied predictions regarding the economy for 2012. It makes sense that the next question will then be–what factor will be most important with regard to which prediction turns out to be correct? We can answer that question in one word–employment. There are many factors helping the economy right now. Companies are sitting on cash, debt levels of consumers have lessened in the past several years and consumer confidence is rising. There are factors holding the economy back right now as well. These include the debt crisis in Europe and the shadow inventory hanging over the housing market. However, the one overriding factor that could override these other factors is employment. Employment is improving, but the unemployment rate remained a stubbornly high as we closed out 2011.
The economy added 200,000 jobs in December and 1.6 million jobs for all of 2011. Definitely this represents a much better performance than the 940,000 jobs added in 2010 and the improvement needs to continue in order to for the unemployment rate to continue to fall from its current level of 8.5%. When you look at the fact that the weekly first time claims for unemployment have dropped from an average of approximately 650,000 per week in 2009 to under 375,000 at the end of December, this is an indication that there could be more good news on the horizon. When people have jobs, they purchase homes and other big ticket items such as cars. We must continue to build consumer confidence and a better job market is the key to sustainable confidence. Companies have cash, but they will not hire unless they know consumers will stay confident. Any significant decrease in unemployment in 2012 will go a long way toward supporting a stronger economic recovery than most have predicted this year.