A newly resilient economy is poised to expand this year at its fastest pace since 2003, thanks in part to brisk spending by consumers and businesses.
To be sure, the economy faces substantial challenges, including high foreclosure rates, rising commodity prices, strained state and local governments as well as the risk that financial tremors in Europe and geopolitical ones in Egypt could cut into growth. And despite the optimistic GDP forecasts, economists expect the unemployment rate will end the year at 8.6%—below January's 9%, but still high by historical standards.
Since late last summer, the economy appears to have strengthened considerably. The economists put the risk of a return to recession at 12%, down from 22% in September.
The headwinds to expansion appear to be subsiding. A majority of economists—32 of 46 who answered the question—say that rising commodity prices are due to supply-and-demand issues stemming from world-wide growth, not bubbles blown by monetary or fiscal policy. On average, they say oil prices would need to jump to $127 a barrel—well above current levels—to bring down growth. Meanwhile, nine of 10 say the turmoil in Egypt hasn't substantially altered their outlook.
While cuts by state and local governments are likely to subtract from growth in 2011, the economists don't expect the drag to be strong enough to derail the recovery. On average, they expect the sector to trim just 0.3 percentage point from economic growth over the year.
Having seen the global economy so far weather Europe's financial crisis, companies are no longer as worried about the risk it poses. They are also far less worried about tax and regulatory issues, as the White House has signaled a more conciliatory tone toward business.
"Every step in the last three months from the Obama administration looks like they're courting the corporate sector," said Bank of America Merrill Lynch economist Ethan Harris.
Businesses appear more confident about spending on new equipment and, more important, new hiring. Although the January employment report showed little job growth, economists have largely discounted that weakness as the result of winter weather. Business surveys paint a brighter picture; another encouraging sign is the number of applications for initial unemployment claims each week, which has dropped to its lowest level since mid 2008.
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Surveys show that consumers remain deeply pessimistic but less than during the recession. However, the recent pace of retail sales suggests that consumers' attitudes are sunnier when they are at the mall than when talking to pollsters, said Chris Varvares, an economist at Macroeconomic Advisers. He reckons that although unemployment is high, people with jobs are no longer as worried that they will be next in line to be laid off. That makes them more willing to make purchases they postponed during the downturn.
At the same time, Federal Reserve data show that credit-card borrowing posted its first gain in two years at the end of 2010, indicating consumers were more willing to spend. In the fourth quarter, consumer spending on durable goods—long-lasting items like cars and washing machines—rose at a 21.6% annual rate. It was the biggest gain since the fourth-quarter 2001 spending surge that followed the Sept. 11 attacks.
"That's an indicator of a significant release of pent-up demand that we think will have staying power into 2011," Mr. Varvares said.
The economists also don't expect the Fed to raise rates any time soon. On average, they forecast inflation will remain near 2% through the end of 2011, which combined with a continued high jobless rate, likely leaves the central bank on the sidelines. Among economists who answered the question, 60% say they don't expect the Fed to raise rates this year.
Since late last summer, the economy appears to have strengthened considerably. The economists put the risk of a return to recession at 12%, down from 22% in September.
The headwinds to expansion appear to be subsiding. A majority of economists—32 of 46 who answered the question—say that rising commodity prices are due to supply-and-demand issues stemming from world-wide growth, not bubbles blown by monetary or fiscal policy. On average, they say oil prices would need to jump to $127 a barrel—well above current levels—to bring down growth. Meanwhile, nine of 10 say the turmoil in Egypt hasn't substantially altered their outlook.
While cuts by state and local governments are likely to subtract from growth in 2011, the economists don't expect the drag to be strong enough to derail the recovery. On average, they expect the sector to trim just 0.3 percentage point from economic growth over the year.
Having seen the global economy so far weather Europe's financial crisis, companies are no longer as worried about the risk it poses. They are also far less worried about tax and regulatory issues, as the White House has signaled a more conciliatory tone toward business.
"Every step in the last three months from the Obama administration looks like they're courting the corporate sector," said Bank of America Merrill Lynch economist Ethan Harris.
About the Survey
The Wall Street Journal surveys a group of 56 economists throughout the year. Broad surveys on more than 10 major economic indicators are conducted every month. Once a year, economists are ranked on how well their forecasts have fared. For prior installments of the surveys, see: WSJ.com/Economist.
At the same time, Federal Reserve data show that credit-card borrowing posted its first gain in two years at the end of 2010, indicating consumers were more willing to spend. In the fourth quarter, consumer spending on durable goods—long-lasting items like cars and washing machines—rose at a 21.6% annual rate. It was the biggest gain since the fourth-quarter 2001 spending surge that followed the Sept. 11 attacks.
"That's an indicator of a significant release of pent-up demand that we think will have staying power into 2011," Mr. Varvares said.
The economists also don't expect the Fed to raise rates any time soon. On average, they forecast inflation will remain near 2% through the end of 2011, which combined with a continued high jobless rate, likely leaves the central bank on the sidelines. Among economists who answered the question, 60% say they don't expect the Fed to raise rates this year.
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