Eighteen months after the recession officially ended, the government’s latest measures to bolster the economy have led many forecasters and policy makers to express new optimism that the recovery will gain substantial momentum in 2011.
Economists in universities and on Wall Street have raised their growth projections for next year. Retail sales, industrial production and factory orders are on the upswing, and new claims for unemployment benefits are trending downward.
Despite persistently high unemployment, consumer confidence is improving. Large corporations are reporting healthy profits, and the Dow Jones industrial average reached a two-year high this week.
The Federal Reserve, which has kept short-term interest rates near zero since the end of 2008, has made clear it is sticking by its controversial decision to try to hold down mortgage and other long-term interest rates by buying government securities.
President Obama’s $858 billion tax-cut compromise with Congressional Republicans is putting more cash in the hands of consumers through a temporary payroll-tax cut and an extension of unemployment insurance for the long-term unemployed.
Tax incentives
It is also trying to address one of the biggest impediments to the recovery — the reluctance of companies to invest their piles of cash in new plants and equipment — by granting tax incentives for business investment.
The measured optimism is reminiscent of the mood a year ago, when the economy seemed to be reviving, only to stall again in the spring amid widespread fears caused by the debt crisis in Greece and other European countries.
Even so, economists are increasingly upbeat about the outlook, saying that while the economy in 2011 will not be strong enough to drive unemployment down significantly, it should put the United States on its soundest footing since the financial crisis started an economic tailspin three years ago.
Phillip L. Swagel, who was the Treasury Department’s chief economist during the administration of George W. Bush and teaches at the University of Maryland, said, “The recovery in 2011 will be strong enough for us to see sustained job creation that will finally give Americans a tangible sense of an improving economy.”
A prominent forecaster, Mark Zandi of Moody’s Economy.com, predicted that the economy would be “off and running” next year. “The policy response, in its totality, has been very aggressive,” he said, “and I think ensures that the recovery will evolve into a self-sustaining expansion early in 2011.”
The recession officially ended in June 2009, when the economy started to grow again. Gross domestic product, the broadest measure of the country’s output, grew at an annualized rate of 3.7 percent in the first quarter of this year. But then it stalled, with the rate falling to a mere 1.7 percent in the second quarter and 2.6 percent in the third quarter.
Jan Hatzius, the chief United States economist at Goldman Sachs, said the economy was likely to grow at an annualized rate of around 3 percent this quarter. Goldman projected last week that the growth rate would be 4 percent for most of 2011. Morgan Stanley, which raised its growth forecast for 2011 to 4 percent, is even more optimistic, forecasting a rate of 4.5 percent this quarter.
Administration officials, who have been burned by premature optimism in the past, were reluctant to make predictions for next year. But Austan D. Goolsbee, the chairman of the Council of Economic Advisers since September, said that a shift in sentiment quickly followed the news of the tax deal
“There aren’t many policies which, on the day Washington announces them, lead most private-sector forecasters to publicly and significantly revise their forecasts upward,” he said. “This one did.”
There are significant caveats to the more positive outlook. The housing market remains weak, and another sustained drop in prices could badly undercut the economy. Financial markets and the banking system remain vulnerable to a new round of jitters in Europe over the debt burdens of countries like Ireland and Spain. There is mounting concern about the tattered balance sheets of state and local governments.
While fiscal and monetary policy seems to be helping the economy in the short turn, the tax-cut compromise essentially deferred looming battles over how to cut federal spending and address the government’s huge debt burden.
The Fed’s bond-buying efforts have not prevented long-term interest rates from rising — a phenomenon that is interpreted by optimists as a reaction to higher growth and by pessimists as a demonstration of the ineffectiveness of the central bank’s efforts and the potential for inflation.
And for most of the roughly eight million Americans who have lost their jobs since the recession began in December 2007, it hardly feels like a recovery.
The unemployment rate remains at its highest level since the early 1980s; it rose to 9.8 percent this month and is likely to remain above 9 percent through all of next year, confirming the view that the United States is in another jobless recovery like the ones that followed the last two recessions, in 1990-91 and in 2001.
“Historically, unemployment rates come down slowly, so even with 4 percent growth, you would expect to see the unemployment rate come down maybe a percentage point a year, probably less,” said Alan B. Krueger, who was the Treasury Department’s top economist until last month when he returned to Princeton. “Given how high the unemployment rate is, that’s going to seem very slow.”
Robert J. Gordon, an economist at Northwestern University and a member of the committee that sets the start and end dates of business cycles, cautioned against excessive optimism, noting the huge burdens on state and local governments, rising costs of health care and other long-run fiscal challenges. “The rise of the stock market is mainly because there are no other good investments in sight, not because the stock market has some unique talent in predicting what’s wrong with the economy.”
N. Gregory Mankiw, a Harvard economist who was chairman of the White House Council of Economic Advisers under Mr. Bush, said that “anything that spooks consumers and businesses from spending” could threaten the recovery, including “a worsening of the fiscal crisis in Europe or the increased fear that a similar crisis will soon infect U.S. cities and states.”
The Fed is likely to end its $600 billion bond-buying program in mid-2011, meaning monetary policy might be providing less of a kick to the economy by the end of the year. Officials in the Obama administration also seem to agree that after the $787 billion stimulus last year and the $858 billion tax-cut compromise just approved by Congress, the government’s arsenal of fiscal tools has just about been used up.
'Business angst is dropping'
“We went through a year and a half period, at least, with the private sector in free fall and government taking a much more significant role than anybody in normal times would want,” said Mr. Goolsbee. “And the president’s oft-repeated view is that we don’t want to be in that circumstance forever — the government should not be the primary driver of long-run growth in the country. We’ve got to have the private sector stand up.”
Representative Kevin Brady of Texas, the top Republican on the Joint Economic Committee of Congress, said he believed his party’s gains in the midterm elections had bolstered consumer and business confidence, arguing that Republicans have advocated fiscal discipline and opposed onerous regulations and tax increases.
“Consumer confidence seems to be on the upswing and business angst is dropping,” he said. “It hasn’t swung into the confidence column yet, but the negativity is lowering.”
This story, "," originally appeared in The New York Times.