Next year's economy: Good enough may be as good as it gets

McClatchy NewspapersDecember 16, 2010 

WASHINGTON — 2011 should be a happy new year for the U.S. economy, according to forecasts from mainstream economists, although their predictions over the past several years have been about as accurate as the local weatherman's.

Most economists predict growth in the range of 3 percent next year. The more optimistic ones see 4 percent.

That's a remarkably positive outlook compared to the past three years, but it's not enough to push unemployment down much.

"The story for growth I think is really quite simple. You come into this period with massive headwinds ... so you're almost guaranteed a weak recovery," said Ethan Harris, the head of developed markets economics in New York for BofA Merrill Lynch Global Research.

Harris projects a growth rate of around 3 percent next year despite the "massive headwinds" from Europe's debt crisis, new regulations on finance, high unemployment, the continuing hangover from the housing bust, and a host of other challenges.

His projection is right where 55 forecasters surveyed by The Wall Street Journal put it, and 3 percent isn't bad in normal times. However, coming out of a typical recession, the economy tends to grow at twice that rate. That underscores that this recession was worse than normal, because it involved a collapsing financial sector.

The mild recovery means the jobless rate is likely to remain uncomfortably high next year. The U.S. economy added 1.2 million jobs from December 2009 to November 2010, but that's 300,000 fewer jobs than were lost in only the first two months of 2009. And 150,000 jobs are needed each month simply to absorb new entrants to the work force.

Still, Americans may begin to feel wealthier next year, if David Bianco is right. He's BofA Merrill Lynch Global Research's chief U.S. stock analyst. He expects the benchmark S&P 500 Index to soar next year, powered by continuing record corporate profits.

"The corporate profit recovery during 2009 and 2010 has surprised everyone to the upside. It's been absolutely a V-shaped recovery," Bianco said.

Record corporate earnings aren't being driven entirely by the U.S. economy because 40 percent of the profits by companies in the S&P index are derived abroad, Bianco noted. "The S&P is much more exposed to business spending, commodities demand and prices, exports and manufacturing activity. The U.S. economy is not the end-all, be-all for the S&P 500."

The global economy is more robust than America's, pulled forward by big developing nations such as China, India and Brazil. It's likely to lift corporate profits and U.S. share prices in 2011. That'll boost individual retirement accounts and 401 k retirement plans of ordinary Americans, likely providing a psychological boost.

Preliminary retail numbers for December show that Americans are beginning to loosen their purse strings, a sign that they're feeling a bit more secure about their financial future.

But unemployment trends will dominate how Americans feel about their economy, and how they spend. The unemployment rate in November stood at 9.8 percent, and economists expect it to rise into double digits early next year as people who exited the labor force return to seek work in the reviving economy. Most forecasts see the jobless rate remaining above 9 percent all of next year.

A growing economy creates more jobs, yet many economists fear that a structural change may be afoot, with many jobs gone forever as companies have figured out how to do more with fewer workers.

"I think what's happening is we're having economic growth in the United States really generated through productivity gains, rather than employment gains," said John Silvia, the chief economist for Wells Fargo Securities in Charlotte, N.C.

Since the recession's official end in June 2009, he said, "We've had the highest productivity gain of any economic recovery, and among the weakest in terms of employment gains. I think that's a change in the way we do business in the United States. ... Unfortunately, I'm of the view that unemployment stays stuck at a higher level for a longer period of time. That's really a challenge for policymakers."

In a Dec. 15 report, the economic research division of Barclays Capital, part of Britain's giant Barclays bank, said that almost half of unemployed Americans have been jobless for more than six months.

"In our view, there are sound reasons to believe that the rise in unemployment will prove to be partly structural in nature and will not decline to pre-crisis levels as the cyclical recovery gathers momentum," the report said. It predicted that an unemployment rate of 7 percent will become accepted as "full" employment in the economy, whereas previously it was about 5 percent, allowing that there are always some people who can't or won't work, or who are in transition between jobs.

Americans blame politicians for high unemployment, one reason why President Barack Obama and his Republican foes agreed to a compromise that extends Bush-era tax cuts for two years in exchange for an extension of unemployment benefits for 13 months, plus a one-year reduction of 2 percentage points in the payroll tax collected from all workers.

The spark from that deal is why Mark Zandi, the chief economist for forecaster Moody's Analytics, is more optimistic than most of his peers. Zandi projects 4 percent growth in 2011, a full percentage point higher than most everyone else predicts.

Zandi cautions, however, that there are several threats to his upbeat forecast.

"We're going to experience more price declines, and as long as you're suffering price declines, nothing else (in the economy) works as well," he said. Small-business owners borrow against their homes, he noted, and ordinary Americans' sense of financial security is tied to what happens to their home values. "Our house-price forecast is on a razor's edge.I worry about that," Zandi said.

A second threat is that businesses could remain cautious and sit on their record profits. Balance sheets are strong, but new jobs could remain scarce.

"The hiring rates are very low, and until I see hiring improve I'll remain very nervous that the economy is not going to stick to my upbeat script," Zandi said.

There's also the threat rising from ballooning deficits because of the tax-cut deal.

Earlier this year, the U.S. dollar began weakening against the euro and other foreign currencies, prompting concern that foreign buyers of Treasury debt such as China and Japan would demand higher interest rate returns for buying U.S. bonds. That would slow the economy.

But as a debt crisis in Greece spread across Europe, the dollar regained strength, reducing that risk.

"The sovereign debt crisis in Europe has been hugely helpful to the U.S. dollar," said Silvia, who provided his 2011 forecast on behalf of the Securities Industry and Financial Markets Association. "We might be the most handsome guy in a room full of ugly people."

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