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What Is the Economic Outlook for 2011?

Dec 13th 2010
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Recently I attended the Lancaster Chamber of Commerce’s Economic and Market Outlook. During the presentation, Linda Duessel, who is senior vice president, senior portfolio manager and market strategist at Pittsburgh-based Federated Investors shared her economic outlook and brought forth what I thought was a fairly realistic view of where our economy is headed. During her presentation she explained why she is very bullish on the stock market in the short term.

She pointed out 3 recent events that are very positive for the stock market in the short term:
1.         The election results – the Republicans taking control of the House of Representatives will result in split government and historically the stock market responds well to gridlock.
2.         The QE2 (Quantitative Easing) – the recent announcement by the Federal Reserve to purchase $600 Billion of debt. (Not sure what QE2 is, click this link to watch my video blog post on the subject.)
3.         The proposed Tax Relief Act (the recent tax comprise) – The bill is basically a $900 billion stimulus plan over the next two years and will certainly boost the economy.
Another interesting point she made was the huge disconnect in the so called recovery between large business and small business. Big business has benefited from the economic stimulus (i.e. most of the benefit has gone to Wall Street). Small business (i.e. Main Street) has not benefited and these business owners have 3 very real concerns and why they are not yet expanding:
1.         Sales – The small business owner is less likely to benefit from a weak dollar (which has been falling as a result of deficits and QE) because they are not doing much exporting. They also are less likely to be in line to receive stimulus money projects.
2.         Taxes – The small business owner is fearful of taxes going up. Interestingly, the 2% payroll tax deduction proposed in the Tax Relief Act only benefits the employees – no benefit to the employer.
3.         Regulations – The small business owner is concerned with increase in requirements to do business. This, like the health care bill, the threat of cap and tax, and card check has made the small business owner nervous.
It is for these reasons she points out that the small business owner is hesitant to hire or to expand. It should be noted that according to the US Small Business Administration 65% of all new jobs are created by a family owned small business. In order to get this economy moving, we should consider helping Main Street.
She also made some points about the long term outlook for our economy. She warned us about the federal deficit and the continued deficit spending. She stressed that our elected officials will need to reduce spending and get the deficit in order because our federal debt held by the public is close to reaching 90% of GDP. We are currently at 63% and growing quickly. She stated that any country that has ever reached 90% has ended up with a permanent reduction of growth. We are currently projected to be at 90% before this decade is over.
When I watch what the federal government is doing (fiscal policies) combined with the central bank (monetary policies), it is becoming very clear that they are only focused on a short term recovery. However, as a country we have to get serious about fixing long term problems.  While the recent tax compromise and extension of unemployment benefits will likely help our economy in 2011 and 2012, we simply kicked the can down the road. We have done nothing to really deal with our long term economic challenges. In order for America to continue to thrive as an economic power, she stated and I agree, we as a country need to live within our means.

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