Five Positive Economic Signs for '11

The new year is a time for optimism, regardless of the circumstances in which we find ourselves. Economically speaking, 2010 was a year spent in the doldrums of a recovery. Unemployment held steady at just under 10 percent, and growth was positive but anemic -- each new piece of data tantalized us with the potential for improvement without reducing the scale of our problems.

Despite all that, and maybe it's a week of vacation talking, I haven't been so optimistic about recovery in months. A number of key indicators, and the combination of the Federal Reserve's new direction in monetary policy with the stimulative effects of the lame-duck tax deal, suggest we may have a more positive economic-growth picture for 2011. That's not to say there aren't dozens of lurking economic threats, but in the spirit of positive thinking, here's what we can look forward to in 2011.

Lower Unemployment. In December, initial jobless claims -- first-time reports of unemployment -- fell to their lowest levels since July 2008: 388,000 across the United States. This was much lower than analysts had anticipated, even if it is not the below-300,000 level economists say will indicate serious growth in the labor market. Still, this is some of the best labor news we've had in a while. On Friday, we'll get the latest data on jobs growth for last December, which should confirm a strengthening labor market. Forecasters are hoping to see around 140,000 new jobs in December -- that's not enough expansion to solve our problems but would be a major step forward.

Higher Growth. The Institute for Supply Management, a trade organization focused on business purchases, reported last week that manufacturing firms are doing more purchasing, hiring, and producing than they have at any time since last May. Economist Tim Duy looked at the fine print and noticed that "new orders gained while inventory measures declined, suggesting solid sales that will sustain future production." Meanwhile, construction spending has increased steadily for the past three months after a long decline; while inventory hangover means we won't see a lot of growth in this sector, it does suggest that contraction is over.

Retailers, too, reported the strongest holiday consumer spending since the recession began in 2007, while yesterday, the Big Three American auto companies reported double-digit sales increases. And, while I don't give too much credence to the predictive power of the markets, bullish trends reflect increasing confidence in the business community. All this suggests more economic growth in the new year.

The QE II, Full Steam Ahead. After months of dickering, the lull in recovery (and the end of the midterm elections) gave Fed Chair Ben Bernanke the opportunity he needed to convince the rest of the Fed's monetary-policy committee to enact pro-growth measures. While the means of this effort -- the purchase of long-term Treasury bills -- attracted criticism, the results are what count: Inflation expectations are rising and with them, growth expectations. The latest Fed minutes suggest that the central bank isn't about to let up on this policy anytime soon. Companies holding on to massive amounts of cash will have less reason to do so and more reason to invest and hire, and bringing the value of the dollar in line with other currencies will help boost exports.

Obama's Tax Deal. The deal everyone in Washington loves to hate is actually quite popular around the country and may even be contributing to the latest boost in President Barack Obama's approval rating, at its highest since last spring (or maybe everyone else is joining me in a bout of 2011 optimism). You probably know the cons -- the deal blows up the deficit, might put Democrats on the political defensive with the incoming Republican House majority, and makes our already creaky tax code look more and more like a Rube Goldberg machine. But the deal also includes 13 months of unemployment benefits, tax incentives for businesses, and a temporary payroll tax cut, all of which will encourage growth in 2011.

Obama's Veto. Perhaps the biggest policy challenge for the economy will be the forthcoming budget battles in the House of Representatives, where an ascendant GOP hopes to push an agenda of austerity while repealing or defunding the Democrats' reform agenda from the last Congress. While Obama's veto pen should be enough to protect health care and financial reform, the bigger challenge will be preventing drastic cuts in public spending, especially the social safety net, while private-sector activity isn't prepared to fill the gap. However, should the president and his party find a way to forestall immediate cuts while agreeing with Republicans to reduce future obligations -- or even reach the Washington holy grail of a comprehensive budget plan and tax reform -- we could see much more confidence in the U.S. economy going forward.

Now, all that was written with rose-tinted glasses perched squarely on my nose. Serious problems in the housing market (chief among them the ongoing foreclosure crisis), large increases in commodity prices, and sudden cuts in government spending -- or, even worse, a crash into the debt ceiling -- could prevent economic recovery. But if confidence is catching, the real turnaround we've been waiting for might be around the corner.

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