As holiday shoppers drag stuffed bags from stores, and a Santa Claus stock market rally warms spirits and 401(k) accounts, economists are full of seasonal cheer and upping their expectations for 2011.
Would this be all, some, the Chicago School mostly, or what economists; surely there must be some sort of limitations to just which economists are full of seasonal cheer!
Most have cast aside any talk of a double-dip recession that was prevalent just about five months ago as housing plunged, European countries worried about paying debts and China started to put the brakes on growth. Now, many economists think the U.S. economy will grow at 3 percent or more in 2011, moving from the recovery phase to expansion.
And just what kind of an impact will that have on social security funding which is assumed to grow by a meager 1.7% for the next 30 years?
For the first time since the economy began its cruel descent into the worst recession since the Depression, economists see evidence that gross domestic product, which is the size of the economy, finally will return to the $13.36 trillion level it left behind in 2007 and surpass that mark in the year ahead.
Ah. so the GDP will be doing better. What about the unemployed, the under-employed, the hanging on by their teeth, the ones who will lose their unemployment bennies?
"It's taken us a very long time to get back to even," said Northern Trust economist Paul Kasriel. "It's been the weakest recovery since the recovery that began in April 1933." Yet, in 2011, "I think people will worry less about losing their jobs, and if you have been out of work, you will start seeing better job opportunities," Kasriel said.
He thinks the economy will grow about 3.3 percent next year and that unemployment could drop to 8.5 percent by the end of 2011. As horrible as 8.5 percent sounds compared with the 5 percent jobless rate that predated the recession, it's an improvement over the recent 9.8 percent or 2009's peak at 10.1 percent.
With almost 17 percent of Americans unemployed or underemployed, it will take years of improved growth to absorb all the people who lost jobs during the last couple years. The economy must create about 150,000 jobs a month to start making a dent in unemployment, and it isn't there yet.
Still, optimism over 2011 has built as consumers have spent more than expected on holiday shopping and as surveys of corporate decision-makers, exports and industrial production have pointed to stronger growth. This month, after Congress extended unemployment benefits for 13 months and extended tax cuts for two years, economists reworked estimates. Many assume Americans will spend much of the extra money and add another one-half to 1 percentage point to GDP growth next year.
Macroeconomic Advisers, for example, had been predicting GDP would grow at 2.4 percent in early 2011 and rise to 3.7 percent for the year. As the firm has evaluated recent economic data, it has estimated growth in the first quarter next year at 3 percent and 4 percent for the year.
Although economists are encouraged by signs of improvement in the economy, they continue to see ongoing threats, including excessive debt in the U.S. and Europe and the possibility that the world's engine of growth, China, will fight inflation by slowing too much.
"The economic recovery will not bring economic health," JPMorgan economist Robert Mellman said in his 2011 forecast. "The boost to growth from lower taxes comes at the expense of a larger budget deficit, now forecast to be $1.5 trillion, or nearly 10 percent of GDP in 2011."
Further, he and other economists note that state and local governments, which provide about 13 percent of the nation's GDP, will have "fiscal challenges for the foreseeable future." "State and local governments face the toughest budget outlook since the Great Depression," said Bank of America Merrill Lynch economist Ethan Harris. "The worst is yet to come." As local governments struggle to pay their bills as property taxes fall along with real estate values, governments will have to slash payrolls and spending, cutting contracts with businesses and adding to the unemployed.
Since early fall, a strong stock market rally apparently has made people with jobs feel more comfortable about spending money. The Dow Jones industrial average is up 10.6 percent this year and has gained 76 percent since the 2009 lows. But while economists have been encouraged by spending, High Frequency Economist Ian Shepherdson said retail sales cannot keep rising at their recent pace because people are not getting pay increases.
"Disposable incomes are rising by only about 0.2 percent per month," he said.
And Americans are still digging out from record levels of debt, a process expected to take years. Although retail sales have been impressive, Shepherdson noted that less than half of all consumption involves retail, and that spending on services "has been subdued."
Some analysts also say it's difficult to understand if the economy is really on a sustainable path or just providing an illusion of strength as government stimulus, in the form of everything from tax cuts to unemployment benefits and the Federal Reserve's quantitative easing, put money into people's hands.
Deutsche Bank's fixed-income team told clients, "We think 2011 will be divided into two halves."
The first half represents a test, the analysts said: "Is the economy gaining sufficient traction that rates can begin some kind of steady normalization? The second half will be the answer." Meanwhile, Morgan Stanley Asia Chairman Stephen Roach thinks 2011 will be a replay of 2010, with optimism early in the year, followed by fear about the aftershocks of the financial crisis.
"The rich countries of the developed world are hobbled by lingering post-crisis aftershocks," he said. "The United States, long the main engine of the global economy is low on fuel. … Europe now faces its own strain of post-crisis aftershocks."
Outlook 2011: U.S. economy This is one in a series of articles looking at what lies ahead for various sectors in the new year.
