An optimistic forecast for the new year

Economist Irwin Stelzer finds that the U.S. economy is in much better shape at the end of 2010 than it was 12 months ago. 2010 was a banner year for corporate profits. As Stelzer observes, “third-quarter pre-tax profits topped their 2006 peak, as firms continued the cost cutting that has seen unit labor costs declining at a rate not seen for 50 year.”
The problem, of course, has been the effect of such cost cutting on the labor market, with businesses keeping their cash on the sidelines, waiting for some sign that the American consumer is returning to the shops. Stelzer argues that Christmas shoppers seem to have provided just that sign, but that their heavy buying should not have been unexpected. He notes that retail sales were alrady rising and had returned to pre-recession levels.
According to Stelzer, “when the final figures are in they are likely to show that we enter the new year with consumer spending — accounting for about 70 percent of the economy — rising at a real (inflation-adjusted) annual rate of something like 4 percent.” And Stelzer believes that overall economic growth in 2011 will likely be in the neighborhood of 3.5 to 4 percent.
If President Obama is to become the comeback kid next year, it will be on the strength of this kind of economic improvement, not his successes in the old Congress. On the other hand, had Obama not yielded on extending all of the Bush tax cuts, and in the process obtained a reduction in payroll taxes and an extension of employment benefits, the prospects for growth in 2011 would not be what they are today.

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