Mark Zandi: Economy should be improved in 2012

In his analysis, Zandi also continued to call for Washington officials to extend the current payroll tax cut and unemployment insurance benefits, saying those two items by themselves were worth 0.9 percentage points of gross domestic product.

The economist acknowledged that extending the current 2-point reduction in the payroll tax and continuing emergency unemployment insurance was expensive. But Zandi also suggested that policymakers could be flirting with another recession if they do not keep those policies going.

“This is a significant threat, particularly early in 2012; the hit from the expiration of these programs would be at its apex even as the economy struggles with fallout from the European debt crisis,” he wrote. “Because of these risks, we assume policymakers will extend the payroll tax reduction, at the very least.”

In all, Zandi said that all the economic provisions set to expire were worth 1.7 percentage points of GDP.

The Moody’s projection comes as lawmakers and the White House continue to haggle over extending the payroll tax cut and passing a broad spending bill to fund the government for the rest of the fiscal year. The current government funding bill expires at the end of Friday.

The House has already passed a payroll tax cut extension, but the GOP bill also contains provisions, such as fast-tracking the Keystone XL oil sands pipeline, that Democrats have rejected. 

On Thursday, Senate Majority Leader Harry Reid (D-Nev.) shifted his tone and said he thought the chamber might be able to wrap up its business for the year in the next couple of days.

As for Zandi, Democrats have touted the economist’s skepticism about GOP spending plans this year, noting that Zandi advised Sen. John McCain’s (R-Ariz.) 2008 presidential campaign.

But Republicans have decried Zandi’s advocacy for stimulus spending and support for the 2009 stimulus package.

In his 2012 projection, Zandi also noted that the economy was growing more swiftly at the end of 2011, with real GDP growth tracking at above 3 percent – compared to roughly 1 percent in the first half of the year.

The economy had to deal with a variety of factors in 2011, including the Japanese tsunami and a spike in commodity prices. But even with next year expected to be better, Zandi says not to expect the economy to break out in 2012.

For instance, the Moody’s report says that, while businesses have the ability to expand their operations, many in that community “still seem shell-shocked from the effects of the Great Recession and discombobulated by events in Washington.”

“How long it will take to get the business cycle back into gear isn’t yet apparent, but it seems unlikely to happen until after the 2012 election,” Zandi added. “Perhaps it will be the election itself, and the preceding debate, that spurs businesses to get back in the groove.”

Zandi added that possible continued declines in the American housing market also pose a threat to the U.S. economy.