It’s that time of the year again. And no, I do not mean the holidays. It is time for top ten list, reviews of last year, forecasts for next year, and the like. I won’t bore you with last year, but what about next year?
Up until last week the consensus seemed to be that our economy would strengthen somewhat in 2011 but would still struggle due to unemployment, housing and commercial real estate issues, and potential tax problems, basically the same stuff we struggled with in 2010. GDP was forecast to average somewhere around 2.0% depending upon who you listen to and unemployment wasn’t expected to decline appreciably.
But then, congress acts upon the Bush tax cuts and lo and behold, the economy and markets are now set to improve greatly. In fact, I have seen estimates for GDP go from 2% to the mid 3% range and others are forecasting that we will see new highs on the Dow Jones Industrial Average in the next year or two. Unemployment could even begin to decline in a noticeable fashion.
Pretty impressive when you consider that nothing much has changed. The tax cuts or rates are already in place with the notable exception of the change in the estate tax rate and exemption level and the 2% reduction in social security wage tax on employees.
At this point, I am not ready to jump aboard this speeding train. Unemployment is still hovering around 10% even though we have had a relatively strong holiday shopping season. The housing market is not likely to boom due to higher interest rates that have seen 30 year fixed mortgage rates go from the low 4% range to over 5% basically shutting off refinancing. Commercial real estate is not expected to grow significantly and finally our local, state, and federal governments continue to struggle to cover their budgets and growing debt burden. Until these begin to show signs of life I question the underlying strength in the markets. This doesn’t mean that we won’t see growth, but that growth may be based more on momentum than fundamentals. I am optimistic but would like to see more fundamental strength.
Of course, our local economy continues to buck the trend if the holiday shopping season is any indication. Several times over the past few weeks I have seen our local mall’s parking lots turn into gridlock, long lines inside stores, and restaurants packed. It does help to have the lowest unemployment rate in the state combined with a comparatively strong housing market. Maybe it’s just the old saying that Madison and Dane County are so many square miles surrounded by reality.
Here’s wishing you a Merry Christmas and a prosperous and happy New Year!