Economists Predict Mixed Forecasts for 2011

Economists have weighed in on their forecasts for 2011 and the results once again validate the conclusion that you can lay all the economists around the globe end-to-end and they’ll never reach a consensus.  Many of them suggest that we no longer need to worry about a double-dip recession.  They forecast growth in the United States economy of over 3% for the year and a return to 2007 level of gross domestic product.

The key to stagnant growth according to Bill Conerly is our slow monetary growth.  The impact of the Federal Reserve’s new policy of “quantitative easing” just continues to retard real monetary growth.

Paul Kasriel, an economist for Northern Trust, said that this has been the weakest recovery since 1933 and yet he expects GDP to grow at a rate of 3.3% and an improvement of our unemployment numbers from the current 9.8% to about 8.5 by year-end.  But, there is concern over this statistic as well because an improving job market may bring the uncounted discouraged workers who gave up looking for work in the past two years (who are not counted in the unemployment statistics) off their couches and to start looking for work again, keeping the unemployment index higher than expected.

In a CNN-Money survey of 23 economists, the average forecasts for 2011 showed:

• Unemployment to be 9% in December 2011
• Economic growth of 3.3% for the year
• Inflation at 1.8% for the year

The optimistic economists are encouraged by better than expected holiday retail sales, although the impact of those increases on consumer debt has not yet been factored in.  Ian Sheperdson of High Frequency Economics says that retail sales cannot keep rising because people are not getting pay raises and disposable incomes are at unsatisfactory levels.  And retailers cannot continue to count on sales increases if credit costs begin their long awaited rise.

Another worry that is peeking around the corner is that as the economy improves, the Fed may begin to ease up on their restraints on interest rates allowing them to rise.

The extension of the unemployment benefits is predicted to add another one-half to one percent to GDP growth but that is coming at a negative impact to the federal debt to make those payments.  This runaway printing press making more money carries with it risks that has yet to be determined.

The Federal Reserve may start the cost of credit increases, or China may start them, but in any event, credit is going to be more expensive in the future.  Whether it impacts 2011 economic health or not is yet to be seen.

In addition to interest rates having an effect on consumer activities, the worrisome competitive positioning of the dollar is another cause for concern.  At the present time, the dollar is kept competitive by the greater concerns over the euro and that the Chinese are still more interested in purchasing our debt rather than European debt.  That could change in an instant for a variety of reasons.  But a weaker dollar will force the Federal Reserve to increase interest rates to attract foreign investors and this would have a negative effect on American consumers.

State and local governments face the greatest budget challenges according to Bank of America-Merrill Lynch economist, Ethan Harris.  He says:  “the worst is yet to come.”  This is especially true where governments deal with declining real estate values which pull down property taxes.  If the state and local governments do not slash payrolls, which of course impacts unemployment, they will find nowhere to turn for financing their budget deficits.

On the bright side, American companies are producing more goods than ever with fewer people.  This has the same effect as a tax cut because it improves the profitability of the companies.  Eventually, these companies will have to hire more people and they will have the profits to fund that growth but we still need to reach an equilibrium of 5% unemployment which seems to be the optimum level to insure both inflation and deflation of wages are under control.