Spending Is Stimulating Economy, Experts Say

Feb 14th, 2011 | By | Category: Business and Finance

Spending by business and consumers has positioned the economy to expand at its fastest rate since 2003, predict economists polled by the Wall Street Journal.

The 51 economists polled who answered expect that Gross Domestic Product (GDP) will be 3.5% higher in the fourth quarter of 2011 than in 2010. This would be the largest increase since 2003. They anticipate GDP will expand at a 3.6% annual rate in the current quarter, up from a 3.2% rate in the final months of 2010.

Businesses appear to be spending more on business and hiring, when winter weather is factored in. The number of applications for initial unemployment claims each week has dropped to its lowest level since mid-2008.

Consumer confidence also appears to be up, judging by credit-card borrowing and retail sales. Credit-card borrowing posted its first gain in two years at the end of 2010. In the fourth quarter, consumer spending on durable goods like cars and appliances rose at a 21.6% annual rate, which was the biggest gain since the fourth-quarter 2001 spending surge following September 11.

The economy continues to struggle with numerous factors, including rising commodity prices, high unemployment, high foreclosure rates, strained state and local governments, and international financial stress in Europe and Egypt.

But economists felt these factors would not stifle growth. A majority who answered the poll question felt rising commodity prices are due to supply-and-demand issues stemming from world-wide growth, not reflections of monetary or fiscal policy. They say oil prices would need to jump to $127 a barrel, well above current level, to bring down growth. They do not anticipate cuts by state and local governments will trim growth more than 0.3 percent. Their optimism is buoyed by the fact the global economy has so far weathered Europe’s financial crisis. Nine of ten say the upheaval in Egypt hasn’t affected their outlook.

Economists are also encouraged by the Obama administration’s moves to reconcile with the business community and reduce regulatory and tax barriers. “Every step in the last three months from the Obama administration looks like they’re courting the corporate sector,” said Bank of America Merrill Lynch economist Ethan Harris.

60% of economists who answered say they don’t expect the Federal Reserve to raise rates this year.

Overall, economists estimate the risk of a return to recession at 12%, down from 22% in September. They forecast inflation will remain near 2% through the end of 2011.

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