Consumer and Business Spending to Spur Expanding U.S. Economy

A newly resilient economy is poised to expand this year at its fastest pace since 2003, thanks in part to brisk spending by consumers and businesses.

In a new Wall Street Journal survey, many economists ratcheted up their growth forecasts because of recent reports suggesting a greater willingness to spend.

The 51 economists polled—not all of whom answer every question in the survey—expect gross domestic product will be 3.5% higher in the fourth quarter of 2011 than a year earlier, up from the 3.3% increase they projected in last month's survey. That would be the largest increase since 2003. They look for GDP to expand at a 3.6% annual rate in the current quarter, accelerating from the 3.2% rate recorded in the final months of 2010.

To be sure, the economy faces substantial challenges, including high foreclosure rates, rising commodity prices, strained state and local governments as well as the risk that financial tremors in Europe and geopolitical ones in Egypt could cut into growth. And despite the optimistic GDP forecasts, economists expect the unemployment rate will end the year at 8.6%—below January's 9%, but still high by historical standards.

Since late last summer, the economy appears to have strengthened considerably. The economists put the risk of a return to recession at 12%, down from 22% in September.

The headwinds to expansion appear to be subsiding. A majority of economists—32 of 46 who answered the question—say that rising commodity prices are due to supply-and-demand issues stemming from world-wide growth, not bubbles blown by monetary or fiscal policy. On average, they say oil prices would need to jump to $127 a barrel—well above current levels—to bring down growth. Meanwhile, nine of 10 say the turmoil in Egypt hasn't substantially altered their outlook.

While cuts by state and local governments are likely to subtract from growth in 2011, the economists don't expect the drag to be strong enough to derail the recovery. On average, they expect the sector to trim just 0.3 percentage point from economic growth over the year.

Having seen the global economy so far weather Europe's financial crisis, companies are no longer as worried about the risk it poses. They are also far less worried about tax and regulatory issues, as the White House has signaled a more conciliatory tone toward business.

"Every step in the last three months from the Obama administration looks like they're courting the corporate sector," said Bank of America Merrill Lynch economist Ethan Harris.

Read entire article at WSJ.com

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