Economic Outlook: Winter 2011

After a dreary first half of 2011, a modest rebound has and will 
continue to occur in the second half of the year. Real GDP climbed at a 2.5% rate in the third quarter and similar expansion is expected for the fourth quarter.

Led by auto sales, real consumer spending on goods and services is expected to exceed 2%. Spending is being financed partly by consumers dipping into savings, which underscores economic fragility. While housing remains weak, there have been flickers of improvement. Business investments in software and equipment have improved and construction of commercial properties may rise 3% this year.


The dollar’s foreign exchange value has touched an all-time low. This has bolstered exports and helped reduce the U.S. trade deficit, but will be cause for alarm if the decline continues. Real government expenditures are rising at a rate of about 2.5%, which is a slight boost to the economy.

The overall outlook is for real GDP growth of about 1.8% this year and 2.3% in 2012. Unemployment is likely to remain in the 9% range next year, as market forces prove to be the ultimate creator of jobs.

Federal finances will attract increasing attention in the coming months. Under the recently enacted Deficit Act, a newly created Congressional super-committee is charged with coming up with $1.5 trillion of spending cuts and/or tax increases. If Congress and the White House fail to approve these recommendations, proposal sequestration will occur on January 15 and government spending will be cut by $1.2 trillion, with defense spending taking a huge hit. Some skeptics predict that Congress will change the rules and prevent automatic spending cuts on January 15.

The Federal government deficit has soared from $0.6 trillion in fiscal 2008 to a projected $1.65 trillion for 2011. To end this horrific trend, the Hoover Institute at Stanford University offers four suggestions:

• Control spending with enforceable procedures.

• Cut spending; don’t raise taxes and be wary of baselines/budget gimmicks.

• Watch out for unintended consequences. In the 1970s, with little analysis or discussion, Social Security benefits were indexed to wage rather than price growth. Because wages usually grow more quickly than prices, indexing has accelerated growth of benefits.

• Tackle fundamentals. Einstein said compound interest is the most powerful force in the universe; Social Security and Medicare must be reined in or they will drive marginal tax rates to the stratosphere.

This article originally appeared in the Winter 2011 edition of Market Letter, a Wintrust Wealth Management publication.