Tea Leaf: What will the new year bring for the U.S. economy?

Published: Tuesday, Nov. 30 2010 5:12 p.m. MST

In this file photo made Dec. 19, 2009, shoppers ride escalators at Water Tower Place in Chicago.

Associated Press

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SALT LAKE CITY — While the American economy has now registered growth for five consecutive quarters, the pace of that growth has been meager, averaging a 2.9 percent real (after inflation) annual rate, and just a 2.1 percent rate during the past two quarters. Such growth trails the average 3.6 percent real annual growth pace of the past 30 years.

What we now call the Great Recession enters the history books at 18 months in duration, officially running from December 2007 to June 2009. Never since the Great Depression has a recession wiped out all net job gains of the prior economic expansion. Never since the Great Depression has a painful and lengthy recession been followed by such a limited growth pace.

Growth in 2011? Most forecasting economists see real growth during 2011 at a 2.5 percent to 3 percent annual rate, with the Federal Reserve's forecast a bit more cheery. As before, major economic headwinds of weak residential and commercial real estate construction, soft housing values and near double-digit unemployment impair the economy. In addition, fragile consumer confidence tied to anxiety about massive government spending and unprecedented budget deficits also constrains growth opportunities.

Budget deficits

Effective steps to reduce future growth rates of U.S. government spending are mandatory to getting this nation's financial house in order. You cannot tax your way to balanced budgets, nor can you tax your way to economic prosperity.

Greater media focus and rising consumer awareness of painful but vital steps necessary to deficit reduction are critical first steps in the process. Both the political left and the political right have been critical of proposals by various deficit reduction groups, while the middle seems more willing to have a healthy debate. Isn't that the basis of effective government: give and take on both sides?

Record budget deficits of the past three years, combined with projected $1,000,000,000,000 annual budget shortfalls for as far as the eye can see, have, to this point, found domestic and global bond markets willing to provide massive deficit funding. However, financial market uncertainty about ongoing budget deficits and huge national (sovereign) debt levels across southern Europe must be "a wake-up call" for the U.S. We will simply not be immune in coming years to financial market distaste and resistance to boatloads of additional U.S. Treasury debt issued to fund irresponsible levels of government spending.

U.S. employment

American job creation is expected to improve somewhat during 2011. However, a modest improvement in net monthly job creation will do little to trim the nation's unemployment rate, which has been at or above 9.5 percent for 15 months, the longest such period since the Great Depression.

Greater clarity from Washington, D.C., in regard to income tax rates, combined with progress toward more affordable government spending, would go a long way toward boosting business sector confidence. In a nutshell, rising confidence levels would enhance employment creation.

Inflation

Sluggish U.S. economic performance, soft home values and major slack in labor markets have led inflation to extremely modest levels in recent months. One measure of consumer inflation recorded its lowest 12-month rise in 53 years!

While inflation is expected to remain mute during 2011, longer-term views remain split between sharply higher inflation and the perils of deflation. The former camp is buying gold and commodities. The latter camp is buying longer-term fixed-rate U.S. Treasury and high-quality corporate debt securities.

The Federal Reserve

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