WASHINGTON – As 2011 begins, the United States appears poised for its strongest year of economic growth since the recession began three years ago.

While plenty of risks remain that could undermine the recovery, signposts for the economy are generally looking up:

• The pace of growth accelerated in the final months of 2010, according to a variety of indicators, following a lull over the summer.

• A wave of government efforts to boost growth is starting to take effect, including a payroll tax cut beginning Jan. 1 and the delayed benefits of a massive Federal Reserve action announced Nov. 3.

• American consumers have made progress paying down their debts and increasing savings. And the stock market has risen steadily in recent months, lifting businesses’ confidence and consumers’ wealth.

More generally, a recovery that seemed tentative and halting a year ago now appears to be durable and more entrenched, having weathered its soft patch earlier in the year.

Macroeconomic Advisers, a leading forecasting firm, estimates the U.S. economy will grow 4.4 percent in 2011; Moody’s Analytics expects 3.9 percent growth; and IHS Global Insight envisions 3 percent growth.

Any of those numbers would represent an improvement from 2010. Although official government numbers are not out yet, gross domestic product looks to have grown 2.7 percent over the past year, Moody’s estimates.

“The economy is on sturdier legs now,” said Robert Dye, senior economist at PNC Financial Services Group. “We’re making a transition to a broader, more durable recovery.”

Dye and other forecasters acknowledge there are risk factors to this sunny forecast that would reduce the pace of growth or even spark another recession.

There is the ongoing contraction by state and local governments, which is sure to be a headwind on growth and could spiral into something worse if a crisis emerges in the market for municipal bonds. Financial troubles in Europe could spill over into U.S. markets, and the price of oil and other commodities could rise toward 2008 highs.

U.S. interest rates could rise sharply if investors lose faith that long-term budget deficits will be reduced, that the Fed will do what is necessary to keep inflation from spiking, or that President Obama and congressional Republicans can reach compromises to keep the government functioning.

“The biggest threat to the economy is that we could see bond investors start to sell off their holdings rapidly, leading to everybody exiting the door at the same time and rates move up rapidly,” said Bernard Baumohl, chief global economist at the Economic Outlook Group, a consultancy. “But the bottom line is that the prospect of a double-dip recession has really diminished compared with a year ago.”

Yet even the forecasts of Baumohl and other economic optimists offer no economic panacea, given the deep hole the United States is in. Growth in the 3 to 4 percent range would likely only be enough to bring the 9.8 percent November unemployment rate down to about 9 percent, according to a consensus of forecasters.

And the unemployment rate could face upward pressure even as the economy strengthens. Many Americans appear to have responded to the weak job market by dropping out of the labor force entirely, giving up even looking for work. If the proportion of Americans in the work force rose back to its pre-recession level, 3.6 million more people would be looking for a job.

 

Copy the Story Link