Will 2011 be a turning point for the economy?
The U.S. economy keeps climbing out of the deep hole left by the financial crash and the Great Recession that followed.
But the recovery’s benefits have been dispensed unevenly, to say the least — which is why many Americans don’t believe things have improved, and lack faith that 2011 will bring better times.
Those doubts, however, could have a silver lining: The bar is low for what might constitute good news that could feed on itself and give the economy significant momentum.
As 2010 ends, though, the sharp disparities of this recovery are what stand out.
Profits boomed at major corporations this year while countless small businesses struggled to stay afloat.
The financial health of most banks continues to improve, but at the expense of diligent savers who are earning virtually nothing on their money as short-term interest rates are held near zero.
Strong sales at luxury retailers like Tiffany & Co. and Coach Inc. have driven their stocks to record highs, even as the number of Americans on food stamps has reached a record 43 million.
Most distressing of all is the employment picture, of course. Despite five straight quarters of economic growth, the U.S. jobless rate, currently 9.8%, is down just slightly from its peak of 10.1% in October 2009.
The greatest challenge facing the economy in 2011 is clear: The job market must turn up, and meaningfully. If that doesn’t happen, Americans’ pessimism could become self-fulfilling.
The employment crisis is what drove Federal Reserve Chairman Ben S. Bernanke in 2010 to take on a role that would have been alien to his predecessors. In his public comments, the 57-year-old Fed chief — a PhD economist who grew up in small-town South Carolina — tried to show that he understood the pain of average families.
While partisanship deepened the divide in Congress for much of the year and the public’s faith in President Obama’s economic policies dwindled, Bernanke donned the mantle of responsibility for bolstering growth and spurring job creation.
“On its current economic trajectory, the U.S. runs the risk of seeing millions of workers unemployed or underemployed for many years,” he said in a speech last month. “As a society, we should find that outcome unacceptable.”
That was his primary defense of the Fed’s controversial commitment Nov. 3 to purchase an additional $600 billion of U.S. Treasury securities through mid-2011. The Fed’s goal in buying bonds from banks and private investors is to hold down longer-term interest rates and to funnel cash into the financial system — and, from there, into the real economy.
The central message of Bernanke’s policies is that “the Fed wants growth, and they want a lot of it,” said Joe Carson, an economist at money manager AllianceBernstein in New York.
But critics see the new bond-purchase program as potentially ruinous. They deride it as a money-printing campaign that risks a severe erosion of foreigners’ confidence in the dollar and could fuel massive inflation down the road.
“It’s just going to make a bubble that could burst later on,” said Robert Auerbach, an economics professor at the University of Texas. He accuses the Fed of “malpractice.”
Indeed, Bernanke has become the favorite target of the doomsday crowd, which taunts him relentlessly in Internet forums. That camp sees the combination of a ballooning federal budget deficit and the Fed’s continued easy-money policies as assuring a new financial-system crash and the next Great Depression.
Even some of Bernanke’s supporters simply doubt that the U.S. economy can make sustained progress, given still-depressed home prices, the reluctance of many banks to lend, and looming state and local government budget cuts.
And with many European countries in austerity mode because of their government-debt crises, and China and other Asian nations trying to slow growth to head off rising inflation, the global economy may be a head wind rather than a tail wind for the U.S. in 2011.
At the moment, however, even the Fed’s detractors have been forced to admit that the recovery’s pace has picked up in recent months, sweeping away the “double dip” recession fears that dominated last summer.
Retail sales this holiday season have substantially exceeded expectations. A monthly measure of manufacturing activity has signaled expansion of the sector for more than a year, and a comparable index for the far-larger services sector last month reached a six-month high.
And with Congress’ extension of the 2001 and 2003 tax cuts that were set to expire Dec. 31, the fear that consumer and business spending would hit a wall Jan. 1 has dissipated.
Real gross domestic product, the government’s inflation-adjusted measure of the economy’s total output, is expected to hit a new high either this quarter or next, more than recovering the last of what was lost in the recession.
Yet U.S. nonfarm employment remains 7.4 million jobs short of the record high of 137.9 million people on payrolls in December 2007. So far this year, net job creation has totaled just 951,000 positions.
Many economists, though dead wrong about job growth in 2010, believe that 2011 will be the turning point. They are betting that plenty of company owners and managers can justify adding staff with sales reviving and with a key reason for not hiring — uncertainty about the tax cuts — now resolved.
Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities in New York, predicts that once hiring kicks in, it will be “pretty much everywhere [in the economy] because the losses were so broad” during the recession.
Wishful thinking? Maybe. But at many companies, the outlook for staffing has definitely brightened.
Among chief executives of major U.S. firms, optimism about the economy is at its highest since 2006, according to the Business Roundtable. The group, which surveys its CEO members quarterly, found in the fourth-quarter survey that 45% expect their U.S. employment rolls to increase in the next six months, up from just 19% a year ago.
Importantly, the mood also has improved among smaller businesses, a crucial engine of job creation.
The National Federation of Independent Business said its optimism index gained 1.5 points to 93.2 in November. Although still depressed by historical standards, the index was up for a fourth straight month to its highest reading since December 2007.
Saunders Manufacturing, a Readfield, Maine, company whose 100 employees produce plastic clipboards, aluminum ring binders and other specialty office products for sale here and abroad, counts itself in the ranks of companies that are “on the cusp” of hiring, said CEO John Rosmarin.
After the company cut employees’ average workweek to 32 hours in 2009, many workers this year have been restored to 36 hours and some to a full 40-hour week, he said.
“If business picks up from here, we’re going to have to add people,” Rosmarin said.
What’s more, the company has been relocating some of the production work it was doing in China to its U.S. plants because of rising labor costs in the fast-growing Asian economy, he said.
“It’s still a little more expensive here, but China is going to be getting more expensive” as the country’s standard of living rises, Rosmarin said.
Yet even as businesses sound more upbeat about the economy, a large swath of Americans aren’t buying it. A Pew Research Center poll of 1,500 adults this month found that 48% believe that a recovery is “a long way off.”
Asked about the year ahead specifically, 55% said they thought it would be better than 2010 — but that was down from the 67% who said in January that they expected 2010 to be better than 2009.
With much of the public expecting so little from the economy, the mood could easily brighten if the job market were to rack up a few months of decent numbers.
LaVorgna, who thinks the economy will add an average of 200,000 jobs a month next year, said that level of growth could have a cascading effect by encouraging employers on the fence about hiring to push the button.
“It’s a confidence game,” he said. “Someone moves, and then someone else moves.”
That is what the Fed is hoping for. Bernanke’s legacy now is tied to pulling unemployment down, although it almost certainly will be a slow process.
As for critics who say the central bank is about to inflate another economic bubble by keeping money too cheap for too long, the Fed clearly has made a choice: It would rather take the chance of facing a future bubble and higher inflation than risk allowing the economy’s current momentum to reverse and fuel a new downward spiral.
