By John W. Schoen Senior Producer
msnbc.com
updated 12/17/2010 12:12:13 PM ET 2010-12-17T17:12:13

By itself, the tax package nearing completion in Washington won't get the U.S. economy back on track. But every little bit helps.

Major Market Indices

And while the U.S. economy is on the mend, it's got a long way to go to repair the damage from the worst financial collapse since the Great Depression.

That’s the view, at least, of a majority of economists surveyed in msnbc.com’s annual Economic Roundtable.

In just the past month, many forecasters have boosted their outlook for next year, based on a series of positive economic reports. Retailers are reporting a better than expected shopping holiday season. Manufacturers are seeing a pickup in production. And private sector job growth — though still very sluggish — has picked up from the first half of the year

"All of this suggests that businesses and consumer are feeling more confident about the recovery and less worried about a double dip," said Nariman Behravesh, chief economist for  IHS Global Insight.

Behravesh and other economists on our panel said the outlook also brightened on the news earlier this month that Congress and the White House agreed to keep federal income tax rates constant and cut payroll taxes. Behravesh figures the tax plan will add about sixth tens of a percent to the gross domestic product next year.

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And there are early signs that companies that have been sitting on large piles of cash are beginning to spend more freely, according to Diane Swonk, chief economist at Mesirow Financial.

"We’re starting to see pensions and institutional investors go after corporations hoarding cash and say, 'Either give it back or redeploy it,'" she said. "Either way you get some better economic feedback."

But sadly it all adds up to another year of relatively modest growth, not nearly enough to make much of a dent in the painfully high 9.8 percent unemployment rate.

The consensus of msnbc.com's Economic Roundtable calls for the gross domestic product to grow just 2.6 percent next year, even a bit slower than the estimated 2.8 percent growth seen in 2010. The unemployment rate is expected to drop only slightly to 9.2 percent by the end of next year, with the most optimistic of our dozen panelists calling for a drop to 8.5 percent.

"There is some momentum in the job market, but in terms of real healing it's just an incredibly slow, painful process," said Ethan Harris, head of developed markets economics at BofA Merrill Lynch.

After a financial meltdown and the longest recession since before World War II, the economy has grown only modestly, at about half the rate that usually would be expected after a downturn.

A huge hangover from the housing bust is one of the major factors holding back the economy, with millions of homes still facing likely foreclosure. And high unemployment is holding down consumer spending and creating a cascade of unpleasant consequences, including huge budget shortfalls at every level of government.

"I think there is just a tremendous skepticism and lack of confidence in the economy from the business sector," said Harris. "They just don’t really believe in the recovery. They don’t want to risk overhiring, and that has a self-fulfilling effect."

Our panelists had mixed opinions on the Federal Reserve's latest plan to boost the economy by buying $600 billion in Treasury securities. Those who saw a positive impact said it would be modest.

The group expects interest rates to remain low by historical standards next year, with about half expected the overnight federal funds rate to remain at its current unprecedented low level of zero to 0.25 percent through the end of next year.

Inflation is also expected to remain low; the consensus estimate sees consumer prices, excluding food and energy, rising just 1 percent next year, about the same as 2010.

Despite the improved outlook, many Americans probably won't feel like the good times are rolling again. For one thing, even as the overall rate of growth improves, the economy is still digging out of the deepest slide since World War II.

"This was indeed the Great Recession," said Joel Naroff, president of Naroff Economic Advisors. "This was a catastrophic collapse of two critical sectors of the economy — housing and finance — two sectors that in the past were needed and usually showed up early in the recovery."

Despite a pickup in growth next year and in 2012, our forecasters expect the unemployment rate to remain stubbornly high for years to come. The consensus pegs the jobless rate at 9.2 percent by the end of next year and not falling back to pre-recession levels of 5 percent for five to seven years — or longer.

The improved outlook will also be felt unevenly: A lot will depend on where you live and where you are on the income ladder. Unemployment levels for college-educated workers have fallen more quickly than the jobless rate for those with less education, for example. And while stock market gains have helped bolster confidence among wealthier households, those on the bottom rungs of the economic ladder are getting squeezed hard by falling home prices.

"Most middle-class families have more wealth tied to their housing than to the stock market while the upper crust of society that where the financial market wealth is concentrated," said Lawrence Yun, chief economist for the National Association of Realtors. "For most middle-class families, they still see some drag in terms of their home values, which many people have looked forward to as part of their retirement savings."

Regions of the country that saw the biggest run-up in the housing boom will take longest to recover as high foreclosure rates continue to bring houses to market at "distressed" prices. That means the housing market won't recover until the pace of new foreclosures returns to pre-boom levels and that backlog of homes is sold, Yun said.

"It's going to take at least a couple of years to fully clear out the distressed properties that need to go through the system," he said.

With the housing market still in a deep hole and consumers tightening their belts, the recovery from the Great Recession is also reshaping the structure of the U.S. economy.

"We've had two decades of debt-financed consumption, and that’s coming to an end," said Behravesh. "Consumer spending will be OK. But it will not be the engine of U.S. or global growth."

Part of the slack in growth from consumer spending is already being taken up by gains in exports.

"The export sector is almost 13 percent of our economy, and that's growing at a double-digit clip," said Michael Englund, chief economist for Action Economics. "That's largely because our trade disproportionately is with Asia, and trend growth in Asia is just much higher than the elsewhere in the world. So trade is a huge."

Despite competition from low-cost manufacturing overseas, Englund notes that U.S. companies still dominate industries like oil drilling and agricultural products and equipment. With emerging economies spurring global demand for food and energy, the U.S. will get a boost from American companies that supply the equipment, technology and supplies needed to feed that growth, he said.

That structural shift — and the need to retrain millions of workers for new careers — also helps explain why the unemployment rate is expected to remain stubbornly high for years to come.

"It's going to take five to seven years. Yes, that’s a lot longer than past recessions. But this was a much steeper recession."

Following is the detailed forecast of our 12 panelists. For more information on the panelists, including how they did last year, click here .

Untitled Document
2011 economic forecast
Members of msnbc.com’s economic roundtable are looking for only moderate growth in 2011, not enough to lower the unemployment much from its current 9.8 percent.
GDP 2010 Q4GDP 2011 Q1 GDP 2011 Q2 GDP 2011 Q3 GDP 2011 Q4GDP 2011 (full year)GDP 2012 annual2011 core CPI (annual)2011 year-end jobless rate2011 year-end fed funds rate
Behravesh
3.0%
2.1%
2.1%
2.4%
3.1%
2.4%
3.0%
0.9%
9.4%
0.2%
Englund
3.4%
3.5%
3.5%
3.6%
3.8%
3.2%
4.0%
0.8%
9.0%
0.5%
Harris
2.5%
2.0%
2.2%
2.4%
2.7%
2.3%
3.0%
0.7%
9.0%
0.1%
Hatzius
2.5%
2.5%
3.0%
3.0%
3.5%
2.7%
3.6%
0.6%
9.3%
0.2%
Leamer
2.4%
2.3%
2.0%
2.2%
3.3%
2.2%
2.8%
1.5%
9.5%
0.2%
Naroff
2.6%
2.2%
2.8%
5.0%
4.4%
2.9%
3.6%
1.8%
8.8%
0.8%
Maki
3.0%
3.5%
3.0%
3.5%
3.5%
3.1%
3.6%
0.9%
8.5%
0.1%
Rosenberg
2.7%
2.4%
2.0%
1.9%
1.9%
2.3%
n/a
1.2%
9.2%
0.1%
Silvia
2.6%
2.7%
2.5%
2.8%
3.1%
2.6%
3.3%
1.0%
9.5%
0.1%
Soss
2.2%
2.7%
3.2%
3.6%
3.6%
2.8%
n/a
0.5%
8.8%
0.1%
Swonk
2.1%
2.1%
2.7%
3.7%
4.0%
2.6%
3.8%
0.7%
9.5%
0.2%
Yun
1.7%
1.9%
1.8%
1.8%
2.5%
1.9%
2.9%
1.4%
9.4%
1.0%
Consensus
2.6%
2.5%
2.6%
3.0%
3.3%
2.6%
3.4%
1.0%
9.2%
0.3%
*GDP is year-over-year growth after inflation, expressed at annualized rate. 0.1% federal funds rate indicates a continuation of the current range of 0 to 0.25%
msnbc.com

© 2013 msnbc.com Reprints

Video: Prospects for Growth

Vote: What do you expect from the economy in 2011?

Explainer: Breaking down the tax compromise

  • Image: President Barack Obama speaks during a news conference at the White House briefing room on the tax cut deal
    Getty Images

    The tax cuts compromise between the White House and congressional Republicans still must be passed. But here is how it would affect major categories of government, and personal, finance.

  • Income tax rates

    Image: Tax forms
    AP

    By extending the current rates across the board, you’ll see no change in the basic tax you pay on earned income: those rates will top out at 35 percent. The Obama administration had wanted to let the rate rise for wealthy taxpayers, but under the deal struck with Republicans, everyone gets to keep the current rate for two years.

    "If this package does indeed pass, it's going to make a significant difference over the coming year for middle-class taxpayers," said Melissa Labant, a tax manager for the American Institute of Certified Public Accountants.

    Economists expect the combination of maintaining current tax rates, reducing payroll taxes and boosting other tax benefits will induce consumers to spend more and investors to turn more bullish.

  • Capital gains and dividend

    Image: Counting money
    Reuters

    Current tax rates on long-term capital gains will remain in place for two years. The tax applies to profits from the sale of an asset, such as stock, held more than a year. The highest rate of 15 percent was expected to rise to 20 percent next year.

    Investors will also benefit from an extension of the historically low tax rates on dividend income, which top out at 15 percent. Had no action been taken, dividend payments would be taxed as regular income. This would raise the tax rate to as much as 39.6 percent for top earners. The extension means a savings of nearly a quarter on every dollar of dividend income for this group.

    Individuals with dividends paid to taxable accounts can collectively expect to save nearly $75 billion over two years, according to an analysis by Standard & Poor's analyst Howard Silverblatt.

    Cliff Caplan, a financial planner and president of Neponset Valley Financial Partners in Norwood, Mass., said the extension of the lower tax rates could lift prices of dividend-paying stocks as they become more popular with investors who can now avoid the higher tax rates for at least two more years.

  • Estate taxes

    Image: Mount Vernon estate
    AP file

    Wealthy taxpayers also benefit from other provisions of the deal. The estate tax on inherited money, which was eliminated altogether in 2010, was scheduled to return to 2001 levels of taxing estates above $1 million at 55 percent. Under the proposed deal, for the next two years, a new 35 percent estate tax will kick in on estates over $5 million ($10 million for couples).

    Except for the temporary repeal of the estate tax this year, the rate has not been less than 45 percent since 1931.

    Only about 4,000 to 5,000 estates will likely owe the estate tax under the plan, based on last year's tax filings. That compares with roughly 7,000 under Obama's earlier proposal of a 45 percent tax on value exceeding $3.5 million. Although that may not sound like a big difference, House Speaker Nancy Pelosi said the new estate tax proposal will add about $25 billion to the deficit.

  • Tax credits

    Image: Child
    AP

    Tuition tax credit
    Families with kids in college can benefit from a tax credit for tuition and fees. A maximum of $2,500 will remain in place for two years. A credit reduces taxes owed, versus a deduction which reduces taxable income.

    Parents familiar with 529 college savings plans may question what to prioritize. A 529 account encourages savings by enabling account holders to make tax-free withdrawals for eligible college expenses.

    Parents should set aside $4,000 per year to maximize the tax credit before contributing to a 529 plan, says Mark Kantrowitz, a college financial aid expert and publisher of FinAid.org. That's because directly lowering their tax bill exceeds the financial benefit of tax-free distributions.

    The extension is welcome assistance: The average annual cost of in-state public four-year schools rose to $7,605 this fall and private college expenses increased to $27,293.

    Child tax credit
    There's more good news if you're a parent: The $1,000 child tax credit is being extended for two years. Taxpayers with income of less than $75,000 — or $110,000 for married couples filing jointly — qualify for the full amount.

    Wealthy taxpayers also benefit from other provisions of the deal. The estate tax on inherited money, which was eliminated altogether in 2010, was scheduled to return to 2001 levels of taxing estates above $1 million at 55 percent. Under the proposed deal, for the next two years, a new 35 percent estate tax will kick in on estates over $5 million ($10 million for couples).

  • Payroll taxes

    Image: Payroll taxes
    AP

    Everyone will also get a break on their payroll taxes, but wealthy taxpayers will get a slightly better break. In exchange for dropping the so-called Making Work Pay tax credit, all taxpayers will get a two percent break on their Social Security payroll taxes for one year. The old tax credit, which maxed out at $400 ($800 for couples), was limited to people who made less than $95,000 (or couples making $190,000.)

    Currently, the government takes 6.2 percent out of your paycheck, up to $106,800, for the Social Security payroll tax. That would drop to 4.2 percent in 2011 and give you an immediate increase in take-home pay. So the more you earn, the more you save.

    If you make $50,000 a year you will pay $1,000 less. If you get paid twice a month, you will have an extra $41.67 in your paycheck starting in January.

    Anyone who makes more than $106,800 a year will receive the maximum savings of $2,136.
    "That certainly provides an added level of dollars to do whatever people were planning on doing, whether that's saving or spending," said Greg Rosica, a tax partner at Ernst & Young LLP.

  • Alternative Minimum Tax

    Image: AMT
    Getty Images file

    Middle class taxpayers get continued protection from a perennial monster called the Alternative Minimum Tax. Under the proposed deal, the existing AMT “patch” will be extended for two more years, saving some 21 million middle class taxpayers from getting hit with these higher rates.

    The AMT was enacted in 1969 to make sure wealthy people couldn't avoid taxes altogether, but it wasn't indexed for inflation. This means Congress has to raise the amount of income exempt from the AMT each year to spare millions from tax increases averaging about $3,900.

    Had no adjustment been made, taxes would have gone up for individuals making as little as $33,750, and married couples making $45,000.

    Similarly, a married couple making $85,000 a year with two college-age children would have had to pay $4,500 more in taxes, according to an analysis by The Tax Institute at H&R Block. A married couple making $100,000 a year with two young children would have faced a tax increase of more than $6,100.

  • Unemployment insurance

    Image: Help Wanted sign
    AFP - Getty Images

    Million of job seekers will benefit from an extension of their benefits at current levels through the end of 2011. The extension applies to workers laid off for more than six months, and less than 99 weeks. Seven million Americans would have lost their benefits through next year without the 13-month extension. Obama's Council of Economic Advisers estimates the provision will create 600,000 jobs next year.

    That's because the unemployed live on the edge, and tend to spend every dollar they get, rather than save. That spending flows to businesses, putting them in better position to hire.

    The average weekly payment for the roughly 8.5 million people receiving unemployment benefits is $302.90. But it varies widely by state, from as little as $119 in Puerto Rico to nearly $420 in Hawaii. Each state sets the amount through a formula meant to replace a portion of an unemployed person's old income.

Data: Latest rates in the US

Home equity rates View rates in your area
Home equity type Today +/- Chart
$30K HELOC FICO 4.75%
$30K home equity loan FICO 5.26%
$75K home equity loan FICO 4.56%
Credit card rates View more rates
Card type Today +/- Last Week
Low Interest Cards 10.91%
10.91%
Cash Back Cards 16.36%
16.36%
Rewards Cards 15.96%
15.94%
Source: Bankrate.com