Economy in 2011 looks mixed

Economic forecasting is risky business. Experts do it anyway, albeit with limited success. But the truth is that an educated guess is better than no forecast. So here goes the guess.

Conventional wisdom expects that the economy in 2011 will follow 2010’s trend of slow growth accompanied by anemic job growth. Gross domestic product growth will not be much higher than in 2010, and it will still fall short of the growth rate needed to lower unemployment to 8 percent. That would require 230,000 to 240,000 new jobs a month for the next two years, and 2011 will more than likely fall short of that mark.

The year 2011, like 2010, will grow in spurts due to uneven growth in the different sectors of the economy. Hiring in the private sector will continue to improve, while job growth in the public sector, especially at the state and local levels, will remain negative or flat.

Job growth that lowers unemployment will remain the critical ingredient for consumer income and spending, so it will continue to be the focal point of monetary and fiscal policies next year. Historically low interest rates and government spending can only go so far to create private-sector jobs and fuel economic growth.

Confidence by the private sector will ultimately determine sustainable growth. Businesses with fewer than 500 employees will play a key role in job growth. Their access to credit and confidence in future growth remains an important ingredient in 2011. To date, both are lacking. The banking sector’s willingness to extend credit to small businesses will remain a concern in 2011. Unfortunately, the health of banking is tied to stable real estate prices, which we do not have.

Some sectors, including business services, health care, education and hospitality, have shown signs of job growth, and those will continue to pick up in 2011. Transportation and technology will grow. Weakness in construction will continue to constrain job growth. Residential construction remains almost nonexistent and commercial construction is still recovering. Unfortunately, manufacturing growth in 2010 has not been matched with job growth. Given the strength of exports, manufacturing jobs should expand. Growth in manufacturing will not outweigh the tremendous job losses from the recession, but will help job creation.

In many ways, 2011 should be a better year for the economy than 2010. Manufacturing will be a bright spot, along with solid improvements in domestic spending on capital goods. Corporate balance sheets will remain strong, with plenty of cash flow and profits. Corporations have deleveraged their balance sheets and will continue to maintain very lean and efficient operations, a byproduct of adjusting to a severe recession. Since many corporations are positioned for growth, they will have to decide whether to use their profits to raise dividends, buy back stocks or invest in capital and new hires.

Businesses will be challenged to match higher sales with longer work weeks for their existing work force, hiring more temporary workers or eventually giving full-time jobs to part-time and temp workers. Without more permanent, full-time jobs many households will continue to put off buying goods. This pent-up demand will be necessary for consumer spending. On the bright side, a rising stock market will recover some of the tremendous wealth loss accrued since 2008.

In the end, more spending will come when businesses and consumers feel confident about the near-term future. Washington would be wise to focus on fostering an environment that creates confidence and reduces uncertainty.

Don Sabbarese teaches economics and directs the Econometric Center at Kennesaw State University’s Coles College of Business.

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