In 2011, better economic outlook – for some

Pundits predict healthy growth in 2011 and fewer unemployed. But housing and state budgets may struggle.

The economy is looking peppier for 2011.

Many financial experts have started to bump up their predictions for growth as they envision the economy moving at a faster pace – not a sprint, but at least no longer a leisurely jog.

Even the less-optimistic economists are now estimating almost 3 percent growth, while the more exuberant see expansion closer to 4 percent. That would be the best performance in a decade.

It wasn't that long ago that the operative adjective for the economy was fragile. But now, talk about the United States moving into a second recession is dissipating.

A move instead toward a faster economic pace could be good news for the nation's unemployed, and it could bolster business confidence. Once economic activity quickens, the cycle can build: Consumers buy products, businesses hire more people to build the gadgets that consumers buy, and new hires spend money on cars, housing, and vacations.

"I think we're approaching a sustainable economy and will hit it in 2011," says Mark Zandi, chief economist at Moody's Analytics in West Chester, Pa. "Next year we are going to be off and running, and unemployment will definitely be moving south."

Many economists, including Mr. Zandi, were far less optimistic a month or two earlier. In November, private economic forecasters, in a survey by the Blue Chip Economic Indicators, said that the gross domestic product would rise only by a modest 2.5 percent in 2011. Some economists even talked about the possibility of a "double dip," meaning the economy tips back into recession.

What happened to change the view?

One major turning point is the Obama and GOP tax-cut agreement. Add in an apparent shift taking place in consumer mentality, with many people a little more willing to buy. Finally, the stock market has improved: Since its close on Dec. 31, 2008, the Dow Jones Industrial Average is up more than 30 percent.

Even before President Obama and the Republicans made their deal on taxes and unemployment, the economy was expected to show a modest gain. But after the handshakes, economists became even more optimistic.

"What it does is reduce the uncertainty in the marketplace. It says both the Congress and the president see economic growth as important," says John Silvia, chief economist at Wells Fargo Securities in Charlotte, N.C. The tax deal will add as much as 0.3 percent to GDP in 2011, Mr. Silvia thinks.

Zandi zeroes in on one part of the tax deal that he thinks will make the economy move even faster: an agreement to let businesses of any size expense 100 percent of their new capital assets through 2011, plus claim a bonus depreciation allowance of 50 percent during 2012.

That will allow businesses to write off their investments in one year – saving them taxes – instead of depreciating the investments over time. "This is what will overcome business's current reluctance to expand," Zandi says.

US corporations already have the firepower. As of September, the titans of industry were sitting on $1.93 trillion in cash or short-term securities, the Federal Reserve says. That's a 51-year high.

The pinstriped set is definitely more bullish, according to a Duke University/CFO magazine survey that concluded on Dec. 10. It found that half of chief financial officers are more optimistic about the US economy, compared with 14 percent who are less optimistic.

"It's a collection of reasons why they are more optimistic – such as borrowing conditions have improved for all but the smallest companies, and many have also had strong export growth," says John Graham, director of the survey and a finance professor at Duke in Durham, N.C.

One reason businesses have kept their powder dry is that they have watched consumers pull back. But even that may be changing.

A spurt of consumer buying has prompted retail analysts to hike their estimates for the holiday season. In mid-December, Chris Christopher Jr., an economist at IHS Global Insight in Lexington, Mass., raised his estimate of holiday sales from a gain of 4.5 percent from 2009 levels to an increase of a little over 5 percent.

Mr. Christopher's optimism comes partly from the rising stock market, which is increasing consumers' net worth. Household net worth increased by $1.2 trillion in the third quarter, according to the Federal Reserve. "Bi-income households are especially sensitive to the value of their nest egg," Christopher says.

A pickup in consumer spending is helping the US manufacturing sector, especially Detroit. That is likely to continue, says Daniel Meckstroth, chief economist at Manufacturers Alliance/MAPI in Arlington, Va.

"More cars are being scrapped now than produced," Mr. Meckstroth explains. "It's gotten to the point where the cost of repairing a vehicle is too much."

The manufacturers themselves, he notes, are buying computers and other high-tech equipment.

Moreover, Meckstroth says, companies that want to expand are enjoying reasonable borrowing costs because interest rates are very low.

If businesses are growing, will they finally put out the help-wanted signs?

The Duke/CFO survey found that US firms expect to augment their full-time workforce by 2 percent in 2011. If that hiring increase occurs, it would be the largest since early 2006. This anticipated rate of hiring suggests that the unemployment rate will fall below 9 percent next year, Mr. Graham says.

Unfortunately, the entire economy may not participate in the better news. Most notably, the housing market continues to struggle. Construction of new homes will probably slowly revive to replenish lean inventories. But, Zandi estimates, prices for existing homes could fall another 5 percent through next fall.

Weighing down home prices is a heavy load of foreclosures. As of December, 4 million homes were already in the process of foreclosure or were expected to result in a default, says John Taylor, president of the National Community Reinvestment Coalition, which advocates on behalf of homeowners in Washington. "I think it will be fair to say there will be 10 million more filings by the end of 2012," he says.

These foreclosures, he points out, put pressure on property values – which means less money for state and local treasuries.

Confronted with adverse economics, states and cities are cutting spending. The states are facing a collective $140 billion gap for their 2011-12 budgets, estimates the Center on Budget and Policy Priorities (CBPP) in Washington.

"This will be the worst state budget year yet," says Jon Shure, deputy director for state fiscal policy at the CBPP. "State revenue is starting to stabilize a little bit, but they won't have the federal Recovery Act [stimulus] assistance, so the hole is just getting bigger for most states."

Since August 2008, the states have laid off 380,000 people, estimates the CBPP, which expects the workforce reductions to continue into next year, if not longer.

In Washington State, Kitsap County knows what it's like to tighten its belt. In its last budget, the county eliminated 30 positions, says Steve Bauer, a commissioner. For next year's budget, the county trimmed another $6 million, or 7 percent. "There is no reason not to think there won't be [job] cuts again this year," he says while emphasizing that the county is not a "doom and gloom" story since it is home to a major naval base.

"The thing that is frustrating for all of us is we keep thinking this can't be real," he says. "We keep thinking this is the year everything turns around."