“Part of the strong showing early this year is related to abnormal weather this winter, with the rest coming from make-up purchases deferred due to Japan-related supply shortages and genuine pent-up demand.”

ANN ARBOR—America’s economy will continue its recovery this year and next as it adds nearly 5 million jobs and unemployment falls below 8 percent, say University of Michigan economists.

“The performance of the U.S. economy during much of 2011 did nothing to alter the perception that we were mired in a sluggish recovery,” said U-M economist Joan Crary.

“Indeed, by late summer economists were considering the likelihood of a double-dip recession.

“The economy regained some momentum during the fall, however, with the closing quarter registering some of the best economic readings of the year. Although the economy is growing at a subpar rate to begin 2012, we expect the pace of economic activity to accelerate over the next two years as the economic headwinds that have plagued the recovery begin to abate.”

In their annual spring forecast update of the U.S. economy, Crary and colleagues Daniil Manaenkov and Matthew Hall say that employment rises at a moderate pace, consumer spending increases, the housing market picks up, vehicle sales improve and inflation remains in check in 2012 and 2013.

They predict that payroll employment will rise by 2.5 million jobs during 2012 and 2.3 million during 2013, an average of 200,000 jobs per month.

“An extrapolation of our forecast suggests that the cumulative job growth during the recovery will finally exceed the jobs lost during the recession in the second quarter of 2014, roughly six years after the previous peak in the first quarter of 2008,” Crary said.

Unemployment is expected to edge downward from the current rate of 8.3 percent to about 8 percent by the end of 2012 and to 7.7 percent a year later.

Crary and colleagues project economic output growth (as measured by real Gross Domestic Product) of 2.3 percent during this year and 2.6 percent during 2013—up from 1.6 percent last year.

They say that real nonresidential fixed investment was a major driver of growth in 2011 and continues to be over the forecast horizon, rising by $113 billion in 2012 and $116 billion in 2013.

“Investment is continuing to lead the country out of the recession as consumption growth remains sluggish and government purchases continue to be a drag on the economy,” Crary said. “Investment in nonresidential construction turned around in 2011. It then accelerates in 2012 and 2013, offsetting slower growth in the equipment and software sector, which remains strong but grows at a more sustainable pace.”

The U-M economists say that residential building is beginning to show signs of life, as well. Single-family housing starts—at an all-time low of 430,000 units last year—will increase by about 100,000 units this year and then reach about 730,000 units in 2013.

Existing single-family home sales are projected to rise by 300,000–400,000 units over the next two years, as housing prices stabilize.

Sales of light vehicles are another indicator of a steadily recovering economy, Crary and colleagues say. Sales totaled 12.7 million units in 2011, up from 11.6 million the year before and will rise to 14 million units this year and to 14.6 million units in 2013.

“Part of the strong showing early this year is related to abnormal weather this winter, with the rest coming from make-up purchases deferred due to Japan-related supply shortages and genuine pent-up demand,” Crary said.

“With the average age of a light vehicle approaching 11 years, many consumers will not be able to delay purchases much longer. While weather-related and “make-up” sales will diminish soon, the release of accumulated pent-up demand should keep pushing vehicle sales higher.”

According to the forecast, core inflation will edge upward to 2 percent this year and drop slightly to 1.8 percent in 2013; the price of oil will average about $102 per barrel this year and about $104 next year; and interest rates, while creeping upward, will remain historically low.

Conventional mortgage rates will average 4 percent this year and 4.2 percent in 2013. The 3-month Treasury bill rate will closely follow the fed funds rate, remaining below 20 basis points through next year, while 10-year Treasury notes will rise from 2 percent now to 2.6 percent by the end of next year.

The U-M forecast is based on the Michigan Quarterly Econometric Model of the U.S. Economy and compiled by the U-M Research Seminar in Quantitative Economics. For more information, visit www.umich.edu/~rsqe.