Economic Outlook, January 2012

A sizeable oversupply and tighter credit standards have hampered the housing market, and it will take substantial gains in real income before demand catches up to the current supply. Consumer spending has been dampened by the loss of a substantial portion of home equity that had been accumulated during the housing boom and by labor market conditions. There are several impediments to more rapid gains in employment: (1) the magnitude of the mismatch between the skills of the unemployed and the skills most in demand by firms with expanding output; (2) the array of changes in tax and regulatory policies, both actual and anticipated; and (3) the significant uncertainties for consumers and businesses imposed by the dire federal budget outlook. There has been growth in business investment in equipment and software, suggesting that the underlying forces of innovation and creativity are still at work. Gross domestic product growth of 2 to 2.5 percent is a reasonable forecast. However, that depends on the magnitude of the recession in Europe, whether consumers in the United States regain their confidence at a more rapid pace, and the pace of business investment spending. Despite last year’s run-up in commodity prices, the inflation outlook is reasonably good.