Economy forecast to keep growing in 2011

  • Article by: NEIL IRWIN , Washington Post
  • Updated: December 31, 2010 - 7:42 PM

A tentative recovery gained vigor in 2010's final months as stimulus efforts kicked in.

WASHINGTON -- As 2011 begins, the United States appears poised for its strongest year of economic growth since the recession began three years ago.

While plenty of risks remain that could undermine the recovery, signposts for the economy are generally looking up: The pace of growth accelerated in the final months of 2010, according to a variety of indicators, following a lull over the summer. A wave of government efforts to boost growth is starting to take effect, including a payroll tax cut beginning Jan. 1 and the delayed benefits of a massive Federal Reserve action announced Nov. 3. American consumers have made progress paying down their debts and increasing savings. And the stock market has risen steadily in recent months, lifting businesses' confidence and consumers' wealth.

More generally, a recovery that seemed tentative and halting a year ago now appears to be durable and more entrenched, having weathered its soft patch earlier in the year. Macroeconomic Advisers, one leading forecasting firm, estimates the U.S. economy will grow 4.4 percent in 2011; Moody's Analytics expects 3.9 percent growth; IHS Global Insight envisions 3 percent growth.

Any of those numbers would represent an improvement over 2010. Although official government numbers are not out yet, gross domestic product looks to have grown 2.7 percent over the past year, Moody's estimates.

"The economy is on sturdier legs now," said Robert Dye, senior economist at PNC Financial Services Group. "We're making a transition to a broader, more durable recovery."

He and other forecasters acknowledge there are risk factors to this sunny forecast that would reduce the pace of growth or even spark another recession. There is the ongoing contraction by state and local governments, which is sure to be a headwind on growth and could spiral into something worse if a crisis emerges in the market for municipal bonds. Financial troubles in Europe could spill over into U.S. markets. The price of oil and other commodities could rise toward 2008 highs, reducing Americans' disposable income.

And U.S. interest rates could rise sharply if investors lose faith that long-term budget deficits will be reduced, that the Fed will do what is necessary to keep inflation from spiking, or that President Obama and congressional Republicans can reach compromises to keep the government functioning.

"The biggest threat to the economy is that we could see bond investors start to sell off their holdings rapidly, leading to everybody exiting the door at the same time and rates move up rapidly," said Bernard Baumohl, chief global economist at the Economic Outlook Group, a consultancy. "But the bottom line is that the prospect of a double-dip recession has really diminished compared with a year ago."

Yet even the forecasts of Baumohl and other economic optimists offer no economic panacea, given the deep hole the United States is in. Growth in the 3 to 4 percent range would likely only be enough to bring the 9.8 percent November unemployment rate down to about 9 percent, according to a consensus of forecasters.

Banks stop tightening credit

And the unemployment rate could face upward pressure even as the economy strengthens. Many Americans appear to have responded to the weak job market by dropping out of the labor force entirely, giving up even looking for work; if the proportion of Americans in the workforce rose back to its pre-recession levels, 3.6 million more people would be looking for a job. As they rejoin the labor force but cannot find a job immediately, it would boost the unemployment rate.

Economic downturns that follow financial crises tend to be longer-lasting and feature slower recoveries than more typical recessions. After the early 1980s recession, which was severe but not driven by financial turmoil, the United States had five straight quarters of growth at a 7 percent or greater annual rate. This time, even economic optimists are not expecting such a boom in the near future.

At the same time, some of the factors that have been major drags on the economy in recent years are starting to have a modestly positive effect. The biggest of these is consumers shedding debt. Americans ran up massive debts during the run-up to the recession and have been paying them down (and in some cases, defaulting) on them since.

And the financial system seems to be stabilizing, with banks no longer tightening the availability of credit, according to a Fed survey of senior loan officers. That, in turn, should help small businesses that depend on banks loans to have greater ability to expand and hire in 2011.

SIGNS OF LIFE

• Economic growth is picking up steam

• Americans are paying down debt and increasing savings

• Banks are loosening credit

• Stock market ended the year strong, D1

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