Issue of the week: How real a recovery in 2011?

The economy performed more strongly than anticipated in the final months of 2010. What does this mean for 2011?

What if the economy recovered and nobody noticed? asked Nin-Hai Tseng in Fortune.com. Signs that the economy is picking up are proliferating, with retail sales rising 3.6 percent during the week after Christmas, compared with a year earlier, which followed November’s surprising 0.7 percent increase in U.S. factory orders. What’s more, “a modest uptick” in the average workweek in November, to 34.3 hours from 33.9 hours in November 2009, “might suggest that sustained job growth is on the horizon.” But it’s going to take an awful lot of hiring to replace the nearly 7.4 million jobs lost since the Great Recession began, in December 2007. “The annoyingly high unemployment rate will improve some but not much,” and is likely to hover around 9 percent by year-end. As a result, “the average person in America will probably still feel little difference” between this recovery and the grinding recession that preceded it.

Don’t be so sure, said James Kostohryz in Minyanville.com, a finance and economics website. The economy’s surprisingly strong performance in the final months of 2010 has economists “furiously revising their forecasts upward,” from a consensus estimate of a 2.6 percent increase in the 2011 gross domestic product to something closer to 3.25 percent. Yet even these “forecasts are far too tepid.” Analysts have underestimated the stimulative effect of the tax compromise that President Obama forged with congressional Republicans in December. “The 2 percent cut in payroll taxes will provide a very significant boost to consumption,” and the business tax breaks contained in the plan “will cause many business managers to pull the trigger” on long-delayed investment projects. That, in turn, could encourage businesses to relieve their “unsustainable understaffing,” resulting in “larger-than-expected employment gains.”

Dream on, said Paul Krugman in The New York Times. The recent run of positive data merely tells us that while the worst is likely over, “we’re still near the bottom of a very deep hole.” Even if the economy were to grow at a robust 4 percent annually for the next couple of years, unemployment would still be above 8 percent by the end of 2012—a rate “that not long ago would have been considered catastrophic.” American companies are actually increasing hiring—just overseas, said Robert Reich in The Christian Science Monitor. Wal-Mart “is hiring like mad outside the U.S.,” while General Electric plans to add 1,000 jobs in Brazil and General Motors predicts that soon almost half its cars will be made in markets “where labor is less than $15 an hour.” The result for business: rising productivity and profits. For ordinary Americans: another year of stagnant incomes, high unemployment, and sagging confidence.

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