Tea Leaf: Looking back, and looking forward, for the U.S. economy

Calendar year 2010 was quite an emotional ride, with numerous unprecedented events taking place. Let's hope 2011 is a bit tamer, even as U.S. economic performance is likely to improve.

Let's see … 2010's list included mind-boggling government stimulus and associated budget deficits around the globe; enormous financial pressure on southern European nations to get a handle on government spending and national debt; a devastating oil spill in the Gulf of Mexico; solid gains in U.S. stocks; volatile and extremely low long-term interest rates, even as short-term interest rates remained at historic lows; a "flash crash" in May that saw the Dow nosedive by nearly 1,000 points in a matter of a few minutes (scaring investors to death); a major Republican surge in November to gain control of the House of Representatives; and an agreement to extend the 2001 and 2003 tax cuts for all taxpayers for the next two years.

Whew!

A decent forecast

Despite all of these shocks and boosts to the U.S. economy, the consensus view of forecasting economists a year ago was — for a change — quite close to the mark. I am a member of four national forecasting panels, including those of USA TODAY and The Associated Press.

Looking back at my own forecasts, as well as the consensus view, the overall expectation of U.S. economic growth near a 2.5 percent to 3.0 percent real (after inflation) annual rate was just a tad high. Forecasts of inflation also came in a bit high. Forecasts of high unemployment were on the mark. The consensus view that the Federal Reserve would begin to tighten monetary policy late in the year proved much too early, with most forecasts now expecting short-term rates to remain at historic lows during most or all of 2011. I have been, and remain, optimistic for stocks.

The consensus view never called for the traditional strong surge of U.S. economic growth following the Great Recession, noting numerous obstacles to growth including weak residential and commercial real estate markets, high unemployment, weak consumer and corporate confidence and anxiety about massive government spending and projected $1,000,000,000,000 annual budget deficits for as far as the eye can see. The consensus view also never shifted to the "double dip" recession view of some forecasters.

That broken clock

Note: Various economists at the extremes were, as usual, wrong. Without naming names, one economic "doomsdayer" a year ago talked of "the collapse of the dollar" during 2010 and "panic will be the order of the day." Another suggested that "2010 is the year when the bear market in stocks returns with full force" and "devastating deflation" is in order.

Whoops!

I have a bone to pick with their constant negativity. A few "doomsday" forecasters were more accurate in 2007 and 2008 when their constant forecasts of economic disaster were closer to the mark. They always call for economic disaster! Even a broken clock is right twice a day.

Yes, the consensus of forecasting economists (including yours truly) did not foresee the Great Recession. The consensus saw a more traditional economic recession, tied in part to excesses that had developed in financial and housing markets.

2011?

The American economy is improving. Political shift in Washington, D.C., and an extension of the Bush tax cuts helped reduce corporate and investor anxiety about what tomorrow holds.