Although the Great Recession officially ended in June 2009, the pace of recovery has been less robust than one would normally expect. However, as we stand on the threshold of a new year, the outlook for the U.S. economy is considerably more optimistic going forward. In light of the improving prospects, here are some intrepid predictions for 2011:
Economic growth picks up speed — Recent legislation extending the Bush tax cuts combined with the Federal Reserve Board’s asset purchases will fuel the acceleration of U.S. economic growth to a 3.5 to 4 percent annual rate next year. Real GDP will finally recoup all of its recession-inflicted loss and eclipse the 2007 level of $13.4 trillion.
Unemployment falls below 9 percent — Net new job creation slowly will increase through the first half and accelerate thereafter, as large firms deploy investment capital and small companies experience stronger demand and easier access to financing.
Discouraged workers and some of the long-term unemployed will begin to retrain and re-assimilate into the work force.
Inflation remains quiescent — While the danger of destructive deflation has largely subsided, there will be little upward pressure on prices as wage rates remain static and retail pricing power inhibited. Consumer prices will rise less than 2 percent next year, and will not gain significant momentum until unemployment drops below 8 percent.
Interest rates inch higher — In anticipation of the end of Fed bond purchases next June and continuing expansion of domestic output, interest rates are likely to drift higher throughout 2011. While the Fed will hold policy static through year-end, market forces will place upward pressure on rates, benefitting savers and income investors but not impinging upon business investment.
Housing stuck in the doldrums — New home construction will not see any significant improvement in the year ahead, and nationwide average home prices may decline further before turning the corner in 2012. Distressed home sales will pick up steam as legal and administrative problems with bank foreclosures are resolved.
Stock market advances — With some political and tax questions resolved, expectations for better corporate profits, and cash shifting out of money market and bond funds, the S&P 500 should continue its ascent (subject to the usual backing and filling) and end the year higher.
Most of the known threats to growth and price stability lurk in 2012 and beyond. On balance, 2011 offers the prospect of solid gains. Happy New Year.
Get answers to financial questions on Wednesdays from our columnists who work in the financial services industry. Chris Hopkins is vice president, investments, at Barnett & Co. Inc. Submit questions to his attention by writing to Business Editor John Vass Jr., Chattanooga Times Free Press, P.O. Box 1447, Chattanooga, TN 37401-1447, or by e-mailing him at jvass@timesfreepress.com.