Ring in the New Year
12:00 PM, Dec 31, 2010 • By IRWIN M. STELZER
As readers of these piece already know, I possess neither a sophisticated model of the U.S. economy such as the ones available to the bright sparks whose mis-measurement of risk almost brought down the financial system, nor a crystal ball. All I can offer with any confidence is the observation that the data suggests we will open for business in the new year in better shape than we were at the beginning of 2010.
Investors are counting their gains: the S&P index of 500 stocks has recovered all of the ground lost since the collapse of Lehman Brothers in 2008, and then some, with financial stocks leading the way. America’s executives are also smiling rather broadly, although given the angry mood on Main Street, they are doing so only in the privacy of their boardrooms and in the company of peers in the showrooms of luxury retailers, and paying (silent) homage to Federal Reserve Board chairman Ben Bernanke for keeping interest rates low. Third-quarter pre-tax profits topped their 2006 peak as firms continued the cost cutting that has seen unit labor costs declining at a rate not seen for 50 years – bad news for the labor market. As we return to work on Monday from our New Year’s celebrations, the corporate cash hoard that has resulted from rising profits and a refusal to spend or invest sits there on the sidelines, waiting for some sign that the American consumer is coming off the couch and returning to the shops.
Christmas seems to have provided just such a sign, with bargain-hunting consumers ringing a merry tune on cash registers in malls and stores – well, more accurately, keeping the swipe-card machines busy. But retail sales were rising even before the holiday spirit took hold, and had returned to pre-recession levels. When the final figures are in they are likely to show that we enter the new year with consumer spending -- accounting for about 70 percent of the economy -- rising at a real (inflation-adjusted) annual rate of something like 4 percent. “It looks like we have transitioned into a period of solid consumer spending,” Barclays Capital economist Dean Maki told the Wall Street Journal. “That makes it hard not to be optimistic about economic growth.”
So hard that most forecasters have been busily revising their 2011 forecasts to reflect consumers’ more open-handed behavior. No longer any worries of a double-dip recession -- the economy is probably growing at a rate in excess of 3 percent going into the new year. The latest view of those brave or foolish enough to put a number to their growth estimates seems to be that the U.S. economy will grow between 3.5 percent and 4 percent in 2011. Not only is consumer spending rising, but businesses seem to be rebuilding shrunken inventories, and manufacturing activity shows signs of expanding, especially in the Midwest. Perhaps best of all, Moody’s Analytics reports that commercial and industrial lending in the quarter that just ended rose for the first time in two years, and is likely to increase by 3 percent this year. Such loans usually go to fund business expansion.
Adding to the probability of relatively satisfactory growth is the deal agreed to by the president and Congress before they fled Washington for their holiday breaks. Plans to increase taxes on incomes of families earning more than $250,000 per year were reluctantly dropped by the president, consumers were given more to spend or save by reducing their payroll taxes, businesses will continue to receive generous write-off treatment of new investments, and the spending power of millions of long-term unemployed will be increased by the extension of benefits for many whose benefits have or will run out. All in all, a new $1 trillion stimulus package to add to the 25-30 percent of the $787 billion first stimulus package not yet spent and due to hit the economy in the coming year.
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