US Economy --2012

It is difficult to sketch a formidable case for real economic growth next year. Corporate profits
have been strong, but the broader measures of real average hourly earnings and real disposable
income have trended down to recession levels. Real DPI With weak real income numbers in
place, you need to make some extra assumptions to see sustained growth in real output. Business
policy on wages has been predatory, as the rate of current $ wage growth measured yr/yr has been
slashed from 3.9% in early 2009 down to 1.6% for Nov. 11. There has been enough inflation
over the past year to put the real wage down to -1.8%. You know, I do not think the US is going
to regain prosperity handing out 1-2% wage increases unless employment growth is very strong,
which as we all know, has certainly not been the case in the current recovery.

This critical weakness in the economy -- low wage growth + low employment growth -- was masked
to some extent in 2011 by a 2% payroll tax reduction. This tax cut is widely expected to be extended
in 2012, but, it will not be incremental on a yr/yr basis, so the real wage pretax will be of
paramount importance. The pressure on the real wage is expected to moderate in 2012, as inflation
seems set to decelerate further. If jobs growth continues and inflation moderates, the case for
growth will strengthen. If the real wage remains under pressure well into 2012, as now seems
the case, then consumers will have to boost credit usage and draw further on savings to keep the
economy above water. So far, households have been tapping savings but have been reluctant
to increase financial leverage. One partial offset to a weak labor market will be a significant
boost in social security payout for 2012.

As I see it now, generating another year of real economic growth will be a "squeaker" without
a much firmer labor market and a continued thawing of the private sector credit markets. This
is especially the case given that export sales -- the strongest US market -- may be set to slow
materially further in a global economy turned sluggish.

Three decent leading indicators for the economy -- industrial metals prices, the long T-bond
yield % and the index of cyclical stocks -- have all come off higher levels set earlier in the
year. Recently there has been some basing in all three -- indicating some re-ignition of hope
for 2012 among investors and traders. These are useful daily measures of sentiment about
prospects for the economy. Triple Play Chart