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Strong week for economy raises optimism for 2011

by Christopher S. RugaberJeannine Aversa
| December 17, 2010 8:00 PM

WASHINGTON - Buoyed by a string of hopeful government reports on layoffs, factory production and consumer spending, economists are predicting that hiring and even housing will pick up in 2011 and make it a better year after all.

The reports issued this week, along with a tax-cut plan that Congress is set to pass, point to stronger overall growth next year, experts say.

Growth "has improved as the year is coming to an end," said Mark Zandi, chief economist at Moody's Analytics. "I'm feeling more optimistic that the economic recovery will evolve into a self-sustaining expansion in 2011."

Zandi expects the economy to grow at an annual rate of 3.5 percent in the October-December quarter. That's up from previous estimates of around 2.5 percent. And for 2011, he and other economists now expect growth at roughly a 4 percent pace, up from earlier forecasts of around 2.7 percent.

With 4 percent growth, the economy would at least be moving closer to the pace of expansion needed to bring down unemployment. Growth of 5 percent is needed for a full year to lower the jobless rate by one percentage point.

The nation's unemployment rate is 9.8 percent, and economists expect it will surpass 10 percent again, though maybe only briefly.

The main reason, they say, is that the improving economy will cause more out-of-work people to resume looking for jobs. People out of work aren't counted as unemployed unless they're actively seeking a job. During recessions, some unemployed people become discouraged and give up.

There is reason for more optimism.

On Thursday, the Labor Department reported that 3,000 fewer people applied for first-time unemployment benefits last week. That brought the seasonally adjusted weekly total to 420,000. And the four-week average of claims, a less-volatile measure, fell for the sixth straight week to 422,750. That's the lowest level since August 2008, just before the financial crisis intensified with the collapse of Lehman Brothers.

When weekly first-time applications for benefits fall below 425,000, the decline tends to signal modest job growth. But economists say applications would need to dip consistently to 375,000 or below to indicate a significant decline in unemployment. Initial applications for benefits peaked during the recession at 651,000 in March 2009.

First-time applications have been declining in the past two months, raising hopes that layoffs are falling and employers are hiring more. So far, though, job gains have been too few to reduce unemployment.

Even the beleaguered housing market is looking a little better. Housing starts rose slightly in November after two months of declines. Builders broke ground on a seasonally adjusted 555,000 units, a 3.9 percent rise from October, the Commerce Department said.

Despite the gain, housing starts are just 16 percent above the 477,000 unit pace from April 2009 - the lowest point on records dating back to 1959. And they are 45 percent below the 1 million annual rate that analysts say is consistent with a healthy housing market.

"Home construction is starting to slowly - and I mean slowly - come back alive," said economist Joel Naroff of Naroff Economic Advisors.

Americans are buying more imported goods. The widest measure of the trade deficit rose 3.3 percent in the July-September quarter, the Commerce Department said Thursday. Consumer demand for clothing, footwear and household appliances boosted imports.

That was the fifth straight quarterly increase, a sign that Americans are confident enough in the economy to spend more.

And Fed Ex Corp., the world's second-largest package delivery company, raised its earnings prediction for the full year on a better economic forecast and a brightened view for the holidays.

Thursday's reports follow encouraging data this week on retails sales and factory output. Both showed gains in November for the fifth straight month. Inflation remains tame. And a survey of CEOs at America's largest companies found that 45 percent expect to hire in the next six months.

"There is a sense that we turned a corner - that the economy may be out of the woods," said Mark Vitner, economist at Wells Fargo.

Still, jobs are what matters most to Americans. Economists don't expect a huge improvement on hiring. Vitner thinks the unemployment rate could rise as high as 10.5 percent next year as more people more come back into the labor force looking for work.

The number of people continuing to receive unemployment benefits rose by 22,000 to 4.14 million, the department said. But that doesn't include 4.8 million more people receiving extended benefits under an emergency program paid for by the federal government.

The extended aid can last up to 99 weeks in states with high unemployment. That program lapsed Nov. 30 but would be continued through next year as part of the compromise on taxes between President Barack Obama and congressional Republicans. That measure is before the House after being approved by the Senate.