Tax Cuts Brighten Still-Dim Economic Outlook

By itself, the tax package nearing completion in Washington won't get the U.S. economy back on track. But every little bit helps.

And while the U.S. economy is on the mend, it's got a long way to go to repair the damage from the worst financial collapse since the Great Depression.

That’s the view, at least, of a majority of economists surveyed in’s annual Economic Roundtable.

In just the past month, many forecasters have boosted their outlook for next year, based on a series of positive economic reports. Retailers are reporting a better than expected shopping holiday season. Manufacturers are seeing a pickup in production. And private sector job growth — though still very sluggish — has picked up from the first half of the year

"All of this suggests that businesses and consumer are feeling more confident about the recovery and less worried about a double dip," said Nariman Behravesh, chief economist for  IHS Global Insight.

Behravesh and other economists on our panel said the outlook also brightened on the news earlier this month that Congress and the White House agreed to keep federal income tax rates constant and cut payroll taxes. Behravesh figures the tax plan will add about sixth tens of a percent to the gross domestic product next year.

And there are early signs that companies that have been sitting on large piles of cash are beginning to spend more freely, according to Diane Swonk, chief economist at Mesirow Financial.

"We’re starting to see pensions and institutional investors go after corporations hoarding cash and say, 'Either give it back or redeploy it,'" she said. "Either way you get some better economic feedback."

But sadly it all adds up to another year of relatively modest growth, not nearly enough to make much of a dent in the painfully high 9.8 percent unemployment rate.

The consensus of's Economic Roundtable calls for the gross domestic product to grow just 2.6 percent next year, even a bit slower than the estimated 2.8 percent growth seen in 2010. The unemployment rate is expected to drop only slightly to 9.2 percent by the end of next year, with the most optimistic of our dozen panelists calling for a drop to 8.5 percent.

"There is some momentum in the job market, but in terms of real healing it's just an incredibly slow, painful process," said Ethan Harris, head of developed markets economics at BofA Merrill Lynch.

After a financial meltdown and the longest recession since before World War II, the economy has grown only modestly, at about half the rate that usually would be expected after a downturn.

A huge hangover from the housing bust is one of the major factors holding back the economy, with millions of homes still facing likely foreclosure. And high unemployment is holding down consumer spending and creating a cascade of unpleasant consequences, including huge budget shortfalls at every level of government.

"I think there is just a tremendous skepticism and lack of confidence in the economy from the business sector," said Harris. "They just don’t really believe in the recovery. They don’t want to risk overhiring, and that has a self-fulfilling effect."

Our panelists had mixed opinions on the Federal Reserve's latest plan to boost the economy by buying $600 billion in Treasury securities. Those who saw a positive impact said it would be modest.

The group expects interest rates to remain low by historical standards next year, with about half expected the overnight federal funds rate to remain at its current unprecedented low level of zero to 0.25 percent through the end of next year.

Inflation is also expected to remain low; the consensus estimate sees consumer prices, excluding food and energy, rising just 1 percent next year, about the same as 2010.

Despite the improved outlook, many Americans probably won't feel like the good times are rolling again. For one thing, even as the overall rate of growth improves, the economy is still digging out of the deepest slide since World War II.

"This was indeed the Great Recession," said Joel Naroff, president of Naroff Economic Advisors. "This was a catastrophic collapse of two critical sectors of the economy — housing and finance — two sectors that in the past were needed and usually showed up early in the recovery."

Despite a pickup in growth next year and in 2012, our forecasters expect the unemployment rate to remain stubbornly high for years to come. The consensus pegs the jobless rate at 9.2 percent by the end of next year and not falling back to pre-recession levels of 5 percent for five to seven years — or longer.

The improved outlook will also be felt unevenly: A lot will depend on where you live and where you are on the income ladder. Unemployment levels for college-educated workers have fallen more quickly than the jobless rate for those with less education, for example. And while stock market gains have helped bolster confidence among wealthier households, those on the bottom rungs of the economic ladder are getting squeezed hard by falling home prices.

"Most middle-class families have more wealth tied to their housing than to the stock market while the upper crust of society that where the financial market wealth is concentrated," said Lawrence Yun, chief economist for the National Association of Realtors. "For most middle-class families, they still see some drag in terms of their home values, which many people have looked forward to as part of their retirement savings."

Regions of the country that saw the biggest run-up in the housing boom will take longest to recover as high foreclosure rates continue to bring houses to market at "distressed" prices. That means the housing market won't recover until the pace of new foreclosures returns to pre-boom levels and that backlog of homes is sold, Yun said.

"It's going to take at least a couple of years to fully clear out the distressed properties that need to go through the system," he said.

With the housing market still in a deep hole and consumers tightening their belts, the recovery from the Great Recession is also reshaping the structure of the U.S. economy.

"We've had two decades of debt-financed consumption, and that’s coming to an end," said Behravesh. "Consumer spending will be OK. But it will not be the engine of U.S. or global growth."

Part of the slack in growth from consumer spending is already being taken up by gains in exports.

"The export sector is almost 13 percent of our economy, and that's growing at a double-digit clip," said Michael Englund, chief economist for Action Economics. "That's largely because our trade disproportionately is with Asia, and trend growth in Asia is just much higher than the elsewhere in the world. So trade is a huge."

Despite competition from low-cost manufacturing overseas, Englund notes that U.S. companies still dominate industries like oil drilling and agricultural products and equipment. With emerging economies spurring global demand for food and energy, the U.S. will get a boost from American companies that supply the equipment, technology and supplies needed to feed that growth, he said.

That structural shift — and the need to retrain millions of workers for new careers — also helps explain why the unemployment rate is expected to remain stubbornly high for years to come.

"It's going to take five to seven years. Yes, that’s a lot longer than past recessions. But this was a much steeper recession."

Following is the detailed forecast of our 12 panelists. For more information on the panelists, including how they did last year, click here.

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