Economy Shows Signs of Growth

Practical Economics

Economy Shows Signs of Growth

Consumers are spending. The next step is for businesses to start hiring.

The economy is showing more signs of pep. Growth in the fourth quarter is increasing at more than 3%, setting the stage for solid economic expansion in 2011.

Official numbers won’t be out until the end of January, but reports of strong retail sales and increases in both auto sales and export orders all point to an accelerating expansion, one that builds on the 2.6% growth in the third quarter.

The gross domestic product actually gained 5% in the fourth quarter of 2009, but this time the picture is more balanced. A year ago, more than half of the increase in GDP came as businesses reversed course and added inventory after cutting to the bone. Consumers, battered by job losses and declining value of stocks and houses, remained on the sidelines, more or less.

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The worry in recent months is that they would stay there, keeping inventory on store shelves and stalling growth because 70% of GDP is tied to consumer spending. Instead, consumer spending is up about 2.5% for the quarter, compared with a 0.9% boost in the fourth quarter a year ago. And business spending on equipment and software continues to be strong -- up 15% in the third quarter. So there’s momentum and balance going into the new year.


Still, it would take 6% growth over six quarters to put GDP on par with other recoveries. Substantial slack remains, with unemployment at 9.8%, and perhaps moving up a bit before declining during most of 2011.

Concern over persistently high unemployment and the possibility that growth would stall is diminished now with the passage of a tax cut package worked out by President Obama and congressional Republicans. Without that, the economy would have struggled to match this year’s 2.8% gain. Instead, the fiscal shot in the arm will propel GDP up about 3.5% for 2011.

Businesses should feel comfortable hiring at that rate of growth. We expect 2.5 million net new jobs in 2011. If the global economy expands as well, there likely will be inflation pressures, but not until 2012. The inflation rate next year should remain tame, about 1.5%. Low inflation combined with a still high unemployment rate will result in the Federal Reserve holding off on any tightening of credit, probably until late in the year.