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6 Predictions About How The Economy Will Affect Average Americans In 2011

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We all remember the worst of 2010: high unemployment, an ongoing foreclosure crisis and megabanks, whose legally dubious practices in foreclosing on millions of homes, managed to spread public anger and financial uncertainty.

To figure out just how the economy would shape our lives in 2011, we asked 6 economists and analysts to cut to the chase and give us their predictions. Instead of the focusing on the market, or the latest intrigue in corporate America we decided to ask our experts a simple question: how will the average American be affected by the economy in the 12 months?

The answers varied, but the majority of our experts did not forecast a dramatic improvement in the labor market or, for that matter, in the housing market. What does 2011 hold in store? Check out the predictions below:

Mark Zandi, Chief Economist, Moody's Analytics:

"The average American will feel measurably better about their financial situation by this time next year. Hiring will improve as 2011 progresses and unemployment will fall. By this time next year, unemployment will be below 9%.

Behind this optimism is that U.S. businesses, particularly large and mid-sized companies, are very profitable and their balance sheets are strong. It is no longer a question of whether businesses can hire and invest more strongly, but are they willing. With the nightmare of the Great Recession fading and the policy uncertainty created by the epic policy decisions of the past year abating, businesses will become more willing.

Stock prices will continue to march higher, reflecting prospects for continued strong corporate earnings growth. The gains won't be as large as the past two years, as investors are already expecting a lot from the U.S. economy in 2011.

The economy will also receive a sizable boost from the recent tax cut deal. Lower payroll taxes, more emergency unemployment insurance benefits, and investment incentives for businesses will ensure that the current recovery evolves into a self-sustaining expansion next year.

The principal threat to economy in 2011 is the ongoing foreclosure crisis. With close to 4 million homeowners in foreclosure or seriously delinquent and headed to foreclosure, the share of home sales that are distressed - foreclosure and short - will rise. This ensures more house price declines, particularly early in 2011. As long as house prices are weakening, the economy is at risk; the home is still the most important [asset] most households own and banks will remain reluctant to extend credit until prices stabilize.

Another major economic headwind that will blow hard next year is the ongoing budget shortfalls at state and local governments. There will be more job and program cuts and tax increases as they work to fill their budget holes that will remain sizable given the end to any further financial help from the federal government. Fears of widespread municipal bond defaults are overdone, but state and local governments will remain a sizable drag on the economy."

Dean Baker, co-director of the Center for Economic and Policy Research:

"I expect little improvement in the labor market, with unemployment at best drifting down slightly. Wages will at best keep pace with inflation.

House prices will fall sharply, ending the year about 15 percent below their peaks in 2010. Economists will be surprised. This will mean more people underwater and probably some increase in the rate of foreclosure as the government remains too much under the control of the bankers to do anything meaningful.

There will be further cutbacks in education and all other services provided by state and local governments.

The weak labor market and falling house prices will further worsen the financial situation of near retirees. However this will do nothing to slow the drive to cut Social Security and Medicare. This crusade is being driven by a quest to redistribute income from the middle class to the wealthy and is not affected by economic reality."

R. Glenn Hubbard, Dean and Russell L. Carson Professor of Finance and Economics, Columbia Business School:

"Timid public policy toward joblessness will be a growing factor in the buildup to the 2012 race.

We will see a municipal finance crisis in the U.S., arising on its own or fueled in part by rising spreads in borrowing costs coming from sovereign Euro woes.

We will see strong fiscal policy consideration of two ideas previously thought untouchable - (a) cutting the corporate income tax rate, and (b) slowing the rate of Social Security benefit growth for upper-income households. The former will be cast as pro-jobs; the latter will be cast as showing seriousness about the nation's long-term budget problems.

Backlash against the Federal Reserve will grow. From the left, the charge will be "too cozy with big finance." From the right, the charge will be "mission creep and too cavalier about future inflation.""

Douglas Elliot, Fellow, Economic Studies, Initiative on Business and Public Policy, Brookings Institution:

"There's a great deal of uncertainty, but the likeliest outcome is that the economy will grow at a decent clip in 2011, although nothing like the sharp recovery we've had from some past recessions. This would bring a modest decline in unemployment, but may not be enough to prevent housing prices from falling a bit further before bottoming out. For its part, the financial sector should make substantially more progress in working its way out of past problems, building on improvements in 2010.

In sum, 2011 is likely to be a year of noticeable progress as we continue to work through the after-effects of the terrible recession, but many problems will remain, including quite high levels of unemployment. The good news is that 2012 may be substantially better still, including the possibility of a serious decline in unemployment.

The financial regulatory reforms will have major effects over time, but little will be evident to the average person in 2011 - the real impact will be over time."

Chris Whalen, Cofounder and Managing Director, Institutional Risk Analytics:

In a recent letter to clients, Whalen describes three bearish scenarios that could wreak havoc on the U.S. economy.

1. "For the next year, the housing, construction and related sector we expect to see deflation driven by lower home prices," Whalen wrote in his letter to clients. Next year, his firm predicts predicts, home prices could fall another 10 percent nationally - and that, Whalen writes, may be too conservative. Pulling down prices further will be a wave of bank-owned properties yet to hit the market.

2. According to Whalen, there will be mounting national and international problems created by concerns about sovereign debt. In the U.S. "the GOP leadership has made it clear in public and we have confirmed privately that the Republicans are perfectly willing to see a major state or group of states flirt with or actually even default," he wrote. The fiscal crisis, he adds, will be used as an opportunity to "gut the pension funds and public sector unions that are the foundation of the Democratic party."

3. A decrease in funding to states and municipalities coupled with a souring real estate landscape could spell big trouble for mega-banks, especially Bank of America, Whalen writes.

Large banks could very well ask for the government for more money or face a restructuring, Whalen predicts, if the Obama administration does not address the problem of millions of Americans living in homes that are worth less than their mortgages. Here's Whalen:

A continuation of the current policy of extend and pretend, however, implies an extended economic malaise and the possibility of a "surprise" as and when [Bank of America] or one of the other large securitization banks (1) reveals additional negative data to a systemically bullish marketplace and/or (2) is subject to an event in the courts that pushes the institution into a restructuring.

Edward Harrison, Founder, CreditWritedowns.com:

"I am feeling a lot more optimistic about the real economy in the US. If you look at the traditional measures of business cycles, all of them are looking pretty good right now: real GDP, real income, employment, industrial production, and wholesale-retail sales. My guess is that real GDP will tick up in the 2-3% range over the first half of the year. The question is the second half. And that's where some of the problems looming underneath come into play.

Housing is clearly double-dipping right now. This has a direct impact on employment because it traps people in homes that are underwater and therefore decreases job prospects as potential jobs in different cities become impossible. The housing double dip also affects how Americans deal with their finances because the psychological effect goes to greater precautionary savings and debt reduction and lower spending. After the stock market drops after 1999 and 2007, Americans learned that the market is not always moving in their favor. These events were painful for those close to retirement age. After 1999, we saw Americans react by moving into residential property as an investment. However, after the collapse in home prices, Americans are more dependent than ever on the 401(k) for saving for retirement. With both stock market and housing market seen as unstable, precautionary savings is bound to increase. A housing double dip only reinforces this dynamic.

Financial regulatory reform has not been groundbreaking in any way. During the crisis, insolvent smaller institutions have failed en masse. Meanwhile the largest institutions have been protected from their own mistakes via bailouts and other hidden subsidies. Nothing in the Dodd-Frank Act changes this. The Dodd-Frank Act is to this crisis what Sarbanes-Oxley was to the last crisis. Dodd-Frank creates more regulations but doesn't address the systemic issues like 'too big to fail.'

The last big American issue is state and municipal funding. My view is that defaults are likely, but the timing and magnitude of the defaults is unclear. The prediction by Meredith Whitney for defaults on hundreds of billions of principal of municipal bond seems impossibly high -especially in a multi-year recovery. Likely we will see service cuts and revenue hikes via taxes and school tution before we see default. These remedies have not been taken by all of the states with the biggest problems. And certainly, cuts and tax hikes are doable in a recovering economy where they may not be in a recession. So it's not clear to me that the muni problem is a 2011 problem yet.

So, on the whole, I am positive. We still have a lot of problems: mortgage fraud, foreclosures, elevated unemployment, house price declines, state and municipal finances, and most importantly high household sector debt loads. The US is not out of the woods and faces the additional contagion risk from Europe. But for the next six months, things should be on an uptrend."

Mark Blyth, fellow at the Watson Institute for International Studies and professor at Brown University:

"Impeding the recovery is all but guaranteed. The foreclosure mess will get worse and bank revenue will go down as costs go up further straining their balance sheets and limiting lending. On the consumer side, savings will stay up as consumers pay down debts, so consumption expenditures, 70 percent of the economy, will remain weak. [Political] gridlock will limit any public sector offsets.

As for major threats, those are the impending debt ceiling vote (don't think that the Tea Party folks now in Congress will not burn down the village to save it) and the future of the Eurozone, which, if it blows up, will depress global demand considerably.

Unemployment will stay high. The most often reported figure from the BLS, is an understatement. The real figure [which includes people who have given up looking for work or are underemployed] is best estimated by their U6 series, which currently sits at 17 percent. Interestingly, after decades of Euro-bashing and cheering for the Great American Jobs Machine (lots of jobs at crappy pay), it now seems that, according to Martin Baily from the McKinsey Global Institute, the rate at which Europe successfully created new jobs in the last decade above population growth was greater than that of the United States. From 1995 to 2008, the EU-15 created 23.9 million additional jobs, while the United States created 20.5 million. So, given faster population growth in the U.S., we need to grow even faster to stand still with the terrible real unemployment that we have.

[Banks will behave] badly. If I am right that their business model is in decline, then having defeated almost all meaningful reform attempts you can expect the same practices that caused the crisis - generating risk, under-insuring, and playing with leverage - to continue. And as revenues shrink and costs go up more risks will be generated to cover these lost areas of revenue until they get into trouble again. They win no matter what happens in the real economy. 'Too big to fail' is, and continues to be, an extortion racket."