Four reasons for optimism in the 2011 economy

December 30, 2010, 3:00 PM UTC

There are real signs that the economic recovery will gain strength next year, but that doesn’t change the fact that most Americans still won’t feel it.

It was around this time last year when it seemed like the U.S. economy was steering into better days. Businesses were investing more on equipment and software and consumer spending was stable.

Exports rose at a healthy pace. And after aggressively reducing goods in stores and warehouses amid one of the deepest recessions in recent American history, companies were starting to restock – helping boost GDP during the last quarter of 2009 to a breakneck pace of 5.7%, the economy’s largest growth spurt in six years.

Such indicators suggested a brighter outlook, but somehow the momentum abruptly faded as debt problems in parts of Europe escalated and government stimulus spending faded. By mid 2010, many who had thought a real recovery was finally under way were left mystified. They worried the economy might slip back into a recession.

As the New Year approaches, the latest economic indicators have analysts suggesting – again – that things will get better in 2011. But will the outcome really be any different this time around?

A few indicators, according to Lexington, Mass.-based economic forecasting firm IHS Global Insight, have helped build the case that things will improve in the coming year:

Working more hours

For one, the average workweek for all employees on private non-farm payrolls was 34.3 hours in November, a modest uptick from the 33.9 hours worked during the same time last year. An increase in worker hours is significant, especially since many employers dramatically cut hours during the recession that started in December 2007 and ended in June 2009. They’ll usually use their existing workers for the maximum hours they can work before hiring new people. So a rise in the average workweek might suggest that sustained job growth is in the horizon.

Corporate spending on the rise

Just when it seemed like companies buying up computers, communications gear and the like would slow after seeing spikes during various periods throughout the year, business investment in capital equipment rebounded in November. Bookings climbed 2.6% after a 3.6% decline in October — a decline that was smaller than previously estimated, according to the US Commerce Department. If the trend continues into 2011, it could be a positive contributor to US growth.

Dollars on the move

Real money supply – the amount of money in circulation measured in traveler’s checks, savings deposits, currency, money market accounts and the like – has increased, rising by 2% this year compared to the previous year.

Nigel Gault, US Chief Economist with IHS, acknowledges that while the development isn’t necessarily a huge move, it nevertheless indicates that activity in the private sector is picking up a bit. After all, the more transactions that happen, the more financing is needed and therefore the more money there is in circulation. And real money supply last year was declining, so the fact that it has reversed is a positive sign.

Wealth in stocks

Another hopeful sign is that stock prices have surged. The S&P 500 last week completed its recovery from the six-month plunge that followed Lehman Brothers’ collapse in September 2008, extending its rally up 85% since its low in March 2009. The index is expected to end 2011 at 1,374 — up more than 9% from today’s levels, according to Bloomberg, citing the average forecast of 11 strategists at Wall Street’s biggest banks. And as The Wall Street Journal reported recently, expectations are that 2011 could be the year that very large multibillion-dollar initial public offerings return, following a year in which most offerings raised less than $200 million.

“I certainly don’t want to get too carried away in optimism,” says Gault, who remains cautious over the prospects of the country’s economic growth.

Gault believes the recovery through 2011 will be vastly different from the current year driven mostly by companies restocking inventory — it will be more genuine. Judging by today’s positive economic indicators, growth will likely be driven by final sales as opposed to inventory building. Gault forecasts that growth could rise around 3.3% next year, markedly higher than the expected 2.9% annual growth for 2010.

But the average person in America will probably still feel little difference. The annoyingly high unemployment rate will improve some but not by much next year. It will probably continue to hover around 9%.

And one of the most critical parts of the recovery, the housing market, probably won’t see any real improvements. Many economists expect home prices to drop by an additional 15% to 30% due to an excess of inventory.

Indeed, this is a gradual recovery. Improvements will be slow – probably so slow that to many it will probably be hard, if not impossible, to follow, let alone take notice.

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