Whittaker Associates: Giving Information Meaning">Whittaker

By Vidhan Rana

We have heard many economists say that the U.S. economy is heavily dependent on consumer spending. (more…)

By Vidhan Rana

Most economists agree that the economy in 2010 is going to be better than it was in 2009. But how much better will things really be? Will we see job growth? Will firms continue the massive layoffs that we saw in 2009?

According to some economists, the U.S. economy began recovering in the second half of 2009. However, the jobless rate has continued to increase. Some have called this a jobless recovery. The video below shows the progression of unemployment across the nation from January 2007, when unemployment was just 4.7%, to the most recent number available for October 2009 when the unemployment stood at 8.8%. As we go through every month in that time period, the increase in unemployment virtually spreads like a plague across the country.

The chief U.S. economist at Barclays Capital predicts that the economy will grow by 3.5% in 2010. Barclays predicts that the recovery will be similar to past recoveries with the American consumer pulling the country out of the recession. Economists at Barclays also believe that the recovery in the stock market since March 2009 and the low gasoline prices will boost consumer spending in the United States, which will drive the economy.

On the other hand, economists at Goldman Sachs predict a much more curtailed or subpargrowth. They believe employers will be reluctant to hire and tread carefully for most of the year. Unlike the classic V-shaped recovery pattern that we normally see after downturns, with growth accelerating as the economy recovers, economists at Goldman Sachs are predicting a more tapered-off type of recovery, where the rate of growth slows as the year progresses.

We don’t expect a V-shaped recovery; in fact we think that 2010 is going to be a bit slower in terms of annualized GDP growth than the second half of 2009, Goldman Sachs Chief U.S. Economist Jan Hatzius said during a recent speech in New York City.

After witnessing a near banking and financial collapse in 2008-2009, many consumers and regulators alike have doubts over the stability of our financial system. Though home sales and prices have picked up, many believe government incentives are the only thing holding those up. With the massive government spending and the resulting budget deficits, fears about inflation are at their highest level ever. Despite these concerns, Goldman Sachs identified the following bright spots in the economy:

The stimulus seems to be having its intended effect ” one reason the odds of a double-dip recession remain remote.

The U.S. housing market, a crucial element of the consumer sector, is showing signs of bottoming out.

The weak U.S. dollar is making U.S. exports highly competitive, giving a much-needed boost to American manufacturers.

With their reluctance to hire, businesses are clearly operating in a highly cost-conscious zone “ a reality that could bode well for corporate profits and for stock prices.

And the overall outlook for the U.S. economy is much better than it was 12 – 18 months ago, and actually continues to improve “ albeit slowly“ a reality that can feed on itself to further bolster growth.

About 60 to 70% of the U.S. economy is based on consumer spending. Even though the housing prices have stabilized and consumers have recovered some of the losses they incurred in their stock portfolio, the sticky job market will dampen economic growth. If we in fact witness a jobless recovery, economic growth may be much lower than the anticipated 3%.

Although the official unemployment rate hit 10.2% last month, the employment outlook is actually much worse. If you factor in part-time workers who’d prefer a full-time position, and people who want work but have given up looking, the real unemployment rate is actually a record-high 17.5%.

A panel of 48 economists surveyed by the National Association for Business Economics (NABE) in November 2009 showed gross domestic product (GDP) in the United States will grow by 3.2%, but job losses won’t bottom until the first quarter of next year. A previous NABE forecast said employers would add 12,000 to payrolls in that quarter.

Most economists agree that the recovery so far has been the direct result of the massive government stimulus package. However, will Corporate America take up the burden in 2010?

Small businesses, which account for about half of all the private sector jobs and have generated about 65% of the new jobs in the nation, are still hurting. In fact, 16% of small-business owners surveyed by the National Federation of Independent Business in November said they are planning to cut jobs in the next three months “ nearly double the number of those planning to add jobs.

A survey of 1,537 chief financial officers in the latest Duke University/CFO Magazine Global Business Outlook Survey showed that most large U.S. companies do not plan to increase capital spending in the near future. Furthermore, 56% of U.S. companies say they are still being adversely affected by credit-market conditions.

According to a Global Outlook Survey, most firms will take several years to return to pre-recession employment levels and some expect to operate with permanently reduced workforces. Unemployment could reach 10.5% before leveling off in the third quarter of 2010, further cramping consumer spending.

Based on consensus, the recovery in 2010 will not really recreate the jobs that have been lost over the last 18 months. Though things may improve, hardships are likely to continue, and consumers are likely to remain skeptical.