The U.S. economy ended 2010 on a clear note of improvement. As estimates of economic growth for 2011 rise, many economists, like the public at large, have become more confident about this year.

Still, the Federal Reserve’s “quantitative-easing” program demonstrates that some economists still worry about sluggish economic growth.

Both the weak recovery to date and trends overseas suggest we need to keep a careful eye on the economy in the coming months.

Consumer spending should continue to provide a solid foundation for overall growth in the gross domestic product, but American consumers are not yet in a position to drive strong growth.

The 2010 holiday season was the best since 2006, and consumer spending rose substantially in the fourth quarter. Despite this, income growth has clearly lagged that of past recoveries; spending patterns suggest many consumers feel extraordinary budget pressure.

However, as personal income and confidence improve, consumer spending should rise. Still, budgetary pressures and memories of the economic collapse may make consumers less able and less willing to spend as aggressively as they have in the past.

Business activity has also rebounded, as both manufacturing and services have expanded.

Yet business growth would need to be extremely strong to compensate for sluggish growth in the larger consumer segment. Although some business spending has been strong, businesses have not been firing on all cylinders.

The trend of overseas sales seems uncertain, particularly as we approach the second half of 2011.

Rapidly rising food costs threaten both the living standards of residents and the stability of governments.

Given those stakes, emerging-markets governments have been waging an intense fight against inflation. Higher interest rates and other constraints on credit should bring inflation under control within those countries — but the cost will be slower economic growth.

This means a number of emerging markets may slow significantly later this year or early in 2012.

Adding fuel to this concern, equity markets are typically a good leading indicator for economies. The weakening performance we have seen in many emerging equity markets bolsters the concerns about the trend of those economies in the coming months.

It does not appear that U.S. exporters can look to strength in Europe or other developed countries around the world if the emerging economies falter.

Similar to that of the United States, economic growth in most developed countries has been much slower than normal over the course of this recovery.

Also, it’s important to note the value of the euro has fallen against the value of the dollar over the last few years, giving European competitors an advantage relative to U.S. producers in global markets.

Slowing economic growth in European or the emerging markets need not lead to outright recessions in those regions, much less in the United States. However, the U.S. economy seems much more reliant on export growth than it has been in past recoveries, so U.S. economic growth may be extremely sensitive to slowing overseas.

While there is room for upside surprises in consumer and business spending in the United States as public confidence improves, we believe U.S. economic growth will remain more sluggish than it has been in past cycles.

Current momentum in the United States should buoy the economy and corporate earnings for the first half this year.

As we approach the middle of this year, however, and begin to anticipate the last months of 2011, the trends in overseas markets may have a much stronger effect on what happens in the United States.


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