Creeping forward

WASHINGTON - The new Congress that begins in January will confront an economy and a job market that will improve only slightly next year, according to an Associated Press survey of leading economists that found them gloomier than they were three months ago.

Unemployment will dip only a bit from the current 9.6 percent to a still-high 9 percent at the end of 2011, in their view. In fact, some economists now think unemployment won't drop to a historically normal 5.5 percent to 6 percent until at least 2018 - several years later than previously envisioned.

The latest quarterly AP survey shows economists are pushing back their estimates of when key barometers of health - hiring, spending, economic growth - will signal strength.

"When you look to 2011, the words to describe the economy are glum, lousy, subpar," said Rajeev Dhawan, director of Georgia State University's Economic Forecasting Center.

In the previous survey in July, the economists had predicted unemployment of 8.7 percent at the end of next year. In the survey before that, they foresaw 8.4 percent.

Voter frustration over unemployment is threatening to cost Democrats their control of the House, and maybe the Senate, in the midterm elections Tuesday. The new Congress appears unlikely to approve more spending to try to invigorate the economy and the job market. And the Federal Reserve is running out of options.

Yet the economists the AP surveyed still expect the economy to sidestep some threats that had raised concerns in recent months. They dismiss the likelihood of a second recession, for instance, and they think the risk of deflation is remote. Deflation is a prolonged drop in prices and wages, which can make people unwilling to spend.

Fed Chairman Ben Bernanke has expressed concern about deflation - one reason the Fed will probably announce Wednesday that it will buy Treasury bonds to try to push down interest rates on loans. Lower rates might spur more borrowing and spending and help raise prices.

The economists are sharply split over whether the Fed should do that. And they overwhelmingly oppose another round of government stimulus spending. They see the economy making steady gains, just more slowly than they expected earlier this year.

The AP survey collected the views of 43 leading private, corporate and academic economists on a range of indicators, including employment, consumer spending and inflation. Among their forecasts:

• The economy will expand just 2.7 percent next year, scarcely more than the tepid 2.6 percent predicted for 2010. Under an economic rule of thumb, growth would have to average about 5 percent for a whole year to lower the unemployment rate by 1 percentage point.

• Consumers will boost their spending 2.5 percent in 2011, slightly better than the increase that economists envision for this year. But spending would have to rise roughly twice that fast to deliver enough economic punch to lower unemployment. Three months ago, the economists were more optimistic about 2011: They predicted consumers would boost their spending 3 percent.

• Inflation will equal just 1.7 percent next year. That's slightly more than the 1.2 percent predicted for this year, and it's about the minimum level of inflation the Fed thinks a healthy economy needs.

• Americans will keep rebuilding their savings, leaving less money for spending. They are expected to save 5.4 percent of disposable income next year. That's only slightly less than the 5.7 percent savings rate predicted for 2010 and still far above the sub-1 percent savings rate that preceded the financial crisis.

What to do about the sluggish economy is the subject of dispute. Two-thirds of the economists surveyed say Congress should refrain from more stimulus spending. Some worry that such aid wouldn't be targeted effectively. Others say the extra spending would take too long to lift the economy.

An overarching concern is that more government spending would widen the budget gap, which hit a near-record $1.3 trillion for the just-completed budget year. That meant the government had to borrow 37 cents of every dollar it spent. The administration is projecting that the deficit for the next budget year will reach $1.4 trillion. Over the next decade, it foresees $8.47 trillion.

Even the Fed's expected move to buy more government bonds sharply divides the economists. Half agree that such purchases, if they further reduce loan rates, would help nudge Americans to spend more, encourage more hiring and help boost the economy.

But the other half counter that further lowering already super-low interest rates would provide little benefit. And they fear that lower rates could ignite runaway inflation later or a wave of speculative buying in commodities, bonds or other assets.

Rates on long-term Treasurys and mortgages have fallen since spring, but the economy has remained weak. The rate on the 10-year Treasury note, for instance, has sunk to 2.6 percent from 4 percent in April. Those rates have fallen as investors have bought Treasurys in anticipation of the Fed's move to buy more. Their demand has lowered Treasury yields, which are widely used to set mortgage rates. Rates on 30-year fixed mortgages now average 4.23 percent, just above the lowest level in decades.

Whether or not Congress or the Fed takes effective action, Robert Roach and nearly 15 million other unemployed Americans feel helpless.

"It's really easy to get discouraged," said Roach, who lost his job about a month ago as principal of the Heartland Christian Academy in Bemidji, Minn. Roach, 55, recently interviewed for a post as student services coordinator at a technical college. The competition included 160 job seekers like him.

Roach holds a doctorate in leadership development, along with a degree in chemistry.

He and his wife, who works in a church office, have paid off their credit card bills. But they face payments on their home and a car. One of their seven children lives at home.

"This isn't just about the economy," said Roach, who lives in Blackduck, Minn. "It is about self-esteem. For those of us out of work, it's very easy to feel isolated and alone."

Fewer people applied for unemployment aid last week than in any week since July, a sign the job market could be improving. Still, economists caution that the improvement would have to be sustained for several more weeks to indicate that hiring is picking up.

The economy's sluggish growth is keeping a lid on hiring. The economy grew just 1.7 percent in the April-June quarter. The Commerce Department is expected Friday to report only slightly better growth of 2 percent for the July-September period.

Sean Snaith, an economics professor at the University of Central Florida, predicted the jobless rate won't fall to 6 percent until 2018.

Even Americans who do have jobs still aren't confident enough to spend freely. Many are still pained by their loss of wealth since the financial crisis struck in 2008. Home equity has fallen sharply from its pre-recession peak. So has the value of stock holdings and retirement savings.

"American households lost $14 trillion of their net worth in the recent recession," said survey participant Albert Niemi, dean of the Cox School of Business at Southern Methodist University. "The loss in wealth, plus tight credit, will depress consumer spending for the next several years."