Forecasters Expect Solid Growth, Low Inflation in 2011

Article excerpt

The U.S. economy's recovery from the 2007-2009 recession is lethargic by historical standards. Job gains remain disappointingly weak, and most forecasters expect to see only a grudgingly slow decline in the unemployment rate over the next year or two. Moreover, many in the business and financial community have regularly cited uncertainty about the economic and political landscape as a reason for their reluctance to hire, invest and lend.

That said, business conditions are on the mend and economic activity is expanding at a modest pace. Eventually, uncertainty will ebb, paving the way for rising levels of employment and real incomes. This dynamic will be assisted importantly by the economy's natural recuperative forces, improvements in financial market conditions and an expansion of the global economy.

On balance, the U.S. economy should surpass its long-run growth rate sometime in 2011, with continued low and stable inflation. But there are risks. These include the possibility of spending cuts and higher taxes to reduce yawning budget deficits at the federal, state and local levels. In addition, because of the size of the Fed's balance sheet and rising commodity prices, there is an unusually large amount of disagreement among forecasters about the direction of inflation over the next few years.

Hurdles Become Lower

Construction remains the economy's soft spot. In a typical economic recovery, housing construction is a key driver of growth. Because of the housing bust and the large number of foreclosures, there is a sizable inventory of houses for sale, limiting the need for new construction. This supply also helps put downward pressure on house prices. Recently, however, home sales and new housing starts have stabilized at a low level, which is the first step toward recovery.

Meanwhile, vacancy rates on commercial and industrial properties are quite high because there was also a boom and bust in commercial construction. There is, thus, no pressing need today for the speculative building in commercial real estate that typically occurs during a recovery.

Other aspects of the economy look markedly better. Consumer spending in the third quarter of 2010 advanced at about a 2.75 percent annual rate, and early indications suggest continued solid gains in the fourth quarter. Likewise, business spending on equipment and software was quite vibrant going into the end of 2010, providing a boost to the manufacturing sector. …