[2011 Outlook] So what will 2011 look like for the US and global economy? 2010 was a year of recovery, but it was sputtering and many questioned whether the recovery was real and if it could be sustained. As we head in to 2011 things are looking brighter following a booming stock market (up 13%), a new 2011 Tax Stimulus package, and housing markets stabilizing around the country. But the one major area of concern is still unemployment, which is staying stubbornly high around 10% despite improving corporate and small business profits. With all these factors in mind, here’s what to expect for the year ahead and what you can do to leverage the forecasted trends.
[Update to 2010 Outlook] The U.S. Bureau of Economic Analysis (BEA) issued the latest US GDP report indicating that the US economy is still growing, albeit at a slower pace than the first quarter of 2010. Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 2.4 percent in the second quarter of 2010, (that is, from the first quarter to the second quarter). In the first quarter, real GDP increased 3.7 percent. The second quarter GDP figure was little slower than many analysts expected, but followed a first-quarter that was revised much higher than initially reported.
The moderation in real GDP growth primarily reflected a larger net trade deficit compared with the previous quarter and a slowdown in inventory investment. These contributions to the moderation in growth were partly offset by the following:
• An upturn in residential investment.
• A pick-up in business investment, mainly an upturn in structures. (Investment in nonresidential structures
rose for the first time since the second quarter of 2008.)
• An upturn in state and local government spending.
• An acceleration in federal government spending.
Inflation: The prices of goods and services purchased by U.S. residents increased 0.1 percent after increasing 2.1 percent. Food prices rose slightly, and energy prices fell sharply. Excluding food and energy, prices rose 0.9 percent after rising 1.6 percent.
Personal income : Real disposable personal income (DPI)—income adjusted for inflation and taxes—rose 4.4 percent in the second quarter after rising 1.7 percent in the first quarter. Personal saving as a percent of real DPI rose to 6.2 percent from 5.5 percent.
Entering 2009, global financial markets seemed to be mired in doom and gloom. With the collapse of many venerable financial institutions, it looked like another great depression was in store. However from March 2009, stock markets began to rise from their lows despite higher unemployment and tight credit markets. Many stock market pundits predicted this as just a summer bear market rally, but have been proved very wrong as the Dow and other stock market indexes soared over 50%. Despite the large rally though, there is still a long way to go before Americans investment and retirement accounts recover. The good news is that it seems that most economists are predicting that 2010 will be a good year for the economy and markets building on gains in 2009. Only time will tell what eventuates, but the outlook entering 2010 definitely seems much better than it was entering 2009
According to a Bloomberg News survey, Dean Maki of Barclays Capital and the most-accurate forecaster over the year, predicts that domestic economy will expand 3.5% in 2010. This will be driven by the rebound in stocks and rising incomes, which will prompt Americans to raise consumption levels. Faced with dwindling inventories and growing demand, companies will then soon become confident the expansion will be sustained. This will mean more jobs and hence more consumption. So the vicious downward spiral that ground the economy down will reverse course and instead work in boosting the economy again. Maki predicts that the unemployment rate will fall to an average of 9% by the end of 2010. Faster growth will also push Treasury (and TIPs) yields higher, to around 4.5%, and help the dollar strengthen as the Fed raises interest rates.
“We don’t believe this time is different from all other business cycles,” said Maki. “The consensus view that growth will stay subdued all through next year — there’s no parallel to that in modern U.S. history.” Maki’s forecast for 2010 is among the highest of the 58 economists in a Bloomberg News survey this month. He is more optimistic than Jan Hatzius, chief U.S. economist at Goldman Sachs Group Inc. in New York, who was No. 1 among forecasters of GDP during the 12 months through June 2009. Hatzius, 41, estimates the economy will expand 2.4 percent in 2010, and his 2.5 percent first-quarter growth forecast is half the pace Maki anticipates. Ed McKelvey, who works with Hatzius, said the Goldman team forecasts “subpar growth” next year because “employers will be reluctant to hire” and households will exhibit “a bias toward higher saving.” Budget difficulties at state and local governments and credit constraints will also restrain the economy, he said. Neal Soss, 60, chief economist at Credit Suisse in New York, was the second most-accurate forecaster of GDP over the first three quarters of 2009. He projects the economy will grow 3.3 percent next year. John Lonski, 58, chief economist at Moody’s Capital Markets Group in New York, was No. 3. He sees a 2.7 percent expansion.
It looks like the pendulum that is the economy, is now swinging back in the positive direction, with more optimism than pessimism now becoming evident. Stock markets will still be volatile in 2010, but if forecasts hold true we could see stock markets up by 10% to 20% next year. Like most everyday investors and consumers, I am still taking a cautious approach in 2010. I have become less conservative in my 401K investment mix, yet I am still making sure that I have sufficient emergency funds available if needed. However, you must invest in market and make your savings work for you. Sitting on the sidelines flush with cash can mean you miss out on potentially strong capital gains while you lose your savings in a rising inflation and taxation environment.