Economists Optimistic on Growth
By: Phil Izzo – Wall Street Journal – January 14, 2011
Economists surveyed by The Wall Street Journal are increasingly optimistic about the pace of the recovery, predicting the U.S. will grow at better than a 3.2% annual rate in each quarter this year. "The U.S. economy appears to have successfully navigated the adjustment from a recovery driven primarily from economic stimulus and inventory rebuilding to one driven by private domestic demand and rising exports," said economists at Wells Fargo & Co. "Three percent growth looks pretty good, particularly with housing stuck in low gear."
Economists have steadily grown more upbeat about growth in recent months and boosted their estimates for the fourth quarter of 2010 in this survey. On average, respondents now estimate the U.S. grew 3.3% at a seasonally adjusted annual rate in the fourth quarter–up from an estimate last month of 2.6% growth. The economy grew 2.6% in the third quarter.
These upbeat forecasts come despite a persistently bleak outlook for housing. On average, the economists now expect that home prices will post a decline in 2011, after more than 12 months of forecasting modest gains for the current year.
Meanwhile, 30 of the 56 surveyed economists, not all of whom answer every question, say home prices won't outpace inflation for at least the next three years. The excess supply of homes also is seen keeping construction at moribund levels. On average, the economists expect 700,000 housing starts in 2011, above 2010 and 2009 levels, but well below the 1.5 million averaged from 1959 to 2007.
"The labor market weakness is suppressing a housing recovery," said Sean M. Snaith of the University of Central Florida.
Amid the stronger growth forecasts, economists now expect the U.S. to generate nearly 180,000 jobs a month on average this year, significantly more than last year's average of 94,000. But with continued population growth, that isn't nearly enough to quickly bring down the unemployment rate, now at 9.4%. By the end of 2011, the economists, on average, expect the jobless rate to be 8.8%.
Persistent weakness in the job market also is expected to keep inflation in check over the course of 2011. On average, the economists expect consumer prices will rise 1.9% this year, within the Federal Reserve's comfort zone of 1.5% to 2%.
The central bank has a dual mandate to promote full employment and maintain price stability. With little pressure on the inflation front and a slow recovery in the job market, most of the economists don't expect the Fed to start raising interest rates until early 2012 at the earliest.
As the recovery moves forward, they expect the central bank to keep mostly to the sidelines. Fifty of 55 respondents predict policy makers will complete a previously announced $600 billion of bond purchases, and stop there. But the policy remains contentious, with just 27 economists supporting the full amount of the program.
The bond purchases "may not have been needed, but [Fed officials] shouldn't give in to critics once they have started," said Jim O'Sullivan of MF Global.
Despite the disagreements over Fed policy, 24 of 40 economists who answered the question gave Fed Chairman Ben Bernanke a grade of A or B, the highest marks among top central bankers. The European Central Bank's Jean-Claude Trichet and the Bank of England's Mervyn King received 22 and 19 grades above a C, respectively. Neither Masaaki Shirakawa of the Bank of Japan nor Zhou Xiaochuan of the People's Bank of China got more than 13 A's and B's.
"All were dealt a tough hand, but Bernanke seems the most innovative," said Bruce Kasman of J.P. Morgan Chase.
The economists also were generally encouraged by President Barack Obama's selection of Bill Daley to succeed Rahm Emanuel as White House chief of staff and Gene Sperling to take over the National Economic Council now that Larry Summers has departed.
Twenty-three of 46 economists said the new team would be better for economic policy, while just one said it would be worse. The remainder expected no significant difference.