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Turning the Corner: Why 2012 Wasn't as Bad as You Think

In so many ways, 2012 was another year of disappointments. Unemployment is still high. Average incomes are still low. Fear and distrust still dominate the discussion.

But the U.K's The Spectator takes a different view. It claimed in an article this week that 2012 "was the best year ever," explaining:

Never in the history of the world has there been less hunger, less disease and more prosperity. ... The West remains in the economic doldrums, but most developing countries are charging ahead, and people are being lifted out of poverty at the fastest rate ever recorded. ... The death toll inflicted by war and natural disasters is also mercifully low. We are living in a golden age.

I've always liked these bits of contrarian optimism. They make you think past the doomsday headlines that dominate the media. To keep the theme going, here are 10 things that happened in 2012 that made the year better than it seemed.

1. Stocks hit an all-time high
The S&P 500 is still about 9% below its record high in 2007. But that figure can be misleading: S&P 500 companies paid out more than $1 trillion in dividends during the last five years. Add dividends back into the market price, and the S&P 500 hit a new all-time high in September.

2. Debt payments as a share of income hit a 29-year low
The financial crisis was largely driven by excessive levels of household debt. But households have been shedding that debt at an unprecedented rate. As people pay off debt, go through bankruptcies, and refinance at record-low interest rates, household debt payments as a percent of income are now at the lowest level since 1983.

3. Housing likely bottomed -- and it's affordable
Major housing indexes show that housing prices bottomed in February or March and are now rising at about the rate of overall inflation. Thanks to price stabilization, 1.3 million fewer homes have an underwater mortgage today than did in the second quarter.

There's some fear that housing prices are still too high and are only rising because of easy monetary policy. But I think it's hard to make that case, given that, as Trulia pointed out this year, "In 98 of America's 100 largest metros it's cheaper to buy a home than rent." Indeed, the ratio of housing prices to average rent is now below the long-term average. More people are buying homes because it makes sense today, not because they're anticipating irrational gains tomorrow. (At any rate, don't expect housing prices to rise considerably. More on that here.)

4. Household formation returned to normal levels
You can tell a lot about an economy by looking at its rate of household formation -- i.e., young people moving out of their parents' places and starting lives of their own. Household formations fell by two-thirds in 2009 to less than 500,000, but they have since rebounded sharply. In 2011, 1.1 million new households were formed, according to the Census Bureau. In the year ended in September, 1.2 million new households were formed -- right in line with the historical average.

5. Corporations prospered like never before
After-tax corporate profits hit an all-time high in July, up 19% from the year before and nearly threefold over the last decade. As a share of GDP, corporate profits are now at the highest level since records began in the 1940s. S&P 500 dividend payments are also at an all-time high. It's a great time to be an investor.

6. Energy output hit the highest level in 14 years
America produced 196 million barrels of oil in July -- the most since 1998. Natural-gas production hit the highest level ever in January. According to energy analyst Daniel Yergin, growth in America's energy output since 2008 has surpassed that of any other country in the world. The International Energy Agency predicts that America will become the world's largest oil producer by 2020, overtaking Saudi Arabia.

7. Growth in health care costs slowed
For the third consecutive year, the Congressional Budget Office reduced its forecast for the amount Medicare will spend in future years. The reason: Cost growth per enrollee is slowing. Over the last 30 years, Medicare costs per enrollee have grown by an average of 2 percentage points above growth in per-capita income. But lately that has dramatically changed. Year to date, Medicare's cost per enrollee has been flat, while income per capita has risen about 3%. According to the Altarum Institute, health care expenditures as a share of GDP declined from 18% in August 2011 to 17.9% in July 2012. This is the best news those worried about long-run budget deficits could ask for. 

8. American manufacturing became competitive again
With natural-gas prices as much as 80% below the levels of Europe and Asia, America is gaining a competitive advantage in manufacturing for the first time in decades. BlackRock CEO Larry Fink recently told the story of a CEO who moved a factory from Germany to America just because of lower energy costs. Expect more of that in the coming years. 

What's more, U.S. wages have been growing more slowly than productivity for decades, while areas like China have been experiencing the opposite. Factor in shipping costs, and Boston Consulting Group thinks parts of America will become the cheapest manufacturing sites in the industrial world within five years.

9. Unemployment claims fell below the historical average
The four-week average of initial unemployment claims fell as low as 366,000 in 2012. Not only is that the lowest level in four years, but it's actually below the 30-year average of 384,000. Total layoffs and discharges at private companies are near the lowest level in more than a decade. Hiring is still slow, but relatively few pink slips are being handed out.

10. Short-term traders bailed; long-term investors rushed in
High-frequency trading -- the computer algorithms responsible for occasional market meltdowns -- declined in 2012, falling from 61% of trades in 2009 to 51%. The New York Times writes: "Firms large and small have been cutting staff, and in some cases have shut down." No one enjoys watching businesses fail, but a sensible argument can be made that the industry does more harm than good.

Meanwhile, Vanguard, the leader of low-cost index investing, has seen inflows of $130 billion year to date -- its best year ever. Vanguard alone now oversees $2 trillion, which is roughly equivalent to all of the hedge funds in the world combined. Long-term money still dominates.

Here's to a great 2013.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics. 

Read/Post Comments (7) | Recommend This Article (58)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 22, 2012, at 8:19 AM, devoish wrote:

    Turning the corner on hunger vs watching the road.

    Progress in reducing the number of hungry people

    The target set at the 1996 World Food Summit was to halve the number of undernourished people by 2015 from their number in 1990-92. (FAO uses three year averages in its calculation of undernourished people.) The (estimated) number of undernourished people in developing countries was 824 million in 1990-92. In 2010, the number had climbed to 925 million people. The WFS goal is a global goal adopted by the nations of the world; the present outcome indicates how marginal the efforts were in face of the real need.

    So, overall, the world is not making progress toward the world food summit goal, although there has been progress in Asia, and in Latin America and the Caribbean. -

    Best wishes,


  • Report this Comment On December 22, 2012, at 8:17 PM, Sunny7039 wrote:

    So, when tens of millions of people in America and all over the world (including Greece, Spain, etc., which one would think are not irrelevant since they are members of NATO) are unemployed, underemployed, or discouraged from even looking for work, corporations have prospered like never before?

    This is good because . . . ? I would expect the investor class to downplay this, not flaunt it.

    Concerning world hunger: I seriously doubt that only 1 in 7 or 8 people globally is undernourished. This sounds closer to the number of people in danger of starvation or seriously stunted development due to severe hunger.

    "Undernourished" is a boarder concept, and certainly includes some Americans (whereas few if any Americans are in danger of starving to death . . . just that record numbers qualify for food stamps is all -- and to be clear, they aren't starving).

  • Report this Comment On December 22, 2012, at 9:03 PM, Sunny7039 wrote:

    Here's a more accurate picture:

    (Thank you yet again, Bloomberg!)

    Also, the .pdf from your other article, which shows the averge compensation for manufacturing in industrialized nations, contains another interesting statistic: US wages are not only mediocre, but US wage growth is the slowest of all. Well, nearly. Greece's was negative. Ours was pretty well flat.

  • Report this Comment On December 25, 2012, at 11:23 PM, Jarmbru wrote:

    That's all great but without a reason to believe that global climate change will not be taken seriously I think we are going to experience very tough times in the near future. Sure hope I'm wrong.

  • Report this Comment On December 26, 2012, at 8:44 AM, Lionel27km wrote:

    Many, many years ago my High School PHD Economics teacher presented us with the idea that being in the middle class was the most interesting in as much as you had two directions in which you could travel. I am not complaining about this years stock market performance, and realize that all this talk about very little inflation is bull to many who live on paycheck to paycheck. Sure if you need and can get a loan or mortgage, interest rates are real low and home prices are still pretty low however, so what? Not everyone is buying a house.

    And yes very low interest rates are good but not for seniors that have seen their interest income reduced by as much as 90%.

    So if you look at the link: that Sunny7039 provided you begin to realize that this Motley Fool article is to pump optimism which may be or may not be called for.

  • Report this Comment On December 26, 2012, at 10:40 AM, snapperreef wrote:

    Number one sounds like it came directly from the Halls of Congress. This is just a way of saying something is what it is not by talking about something else entirely. Like cutting the rate of increase in a budget item is a draconian cut in the money spent.

    The S&P is based on the price of the included stocks; not on the price plus any dividends earned.

  • Report this Comment On December 26, 2012, at 1:20 PM, StopPrintinMoney wrote:

    Well now I think we aren't as f&^%ed as a country as I initially thought. Thanks for opening my eyes.

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