Growing Business Confidence Fuels US Economy
Monday, January 31, 2011

While unemployment is expected to remain stubbornly high in the months ahead, business confidence appears to be higher now than for a number of years and a wave of new hiring will lead the US economy to grow at a faster rate than recently predicted, according to economists.

The latest quarterly economic survey by Associated Press suggests that confidence levels are high enough for the US economy to withstand a number of potential threats, such as falling home prices and higher interest rates. Unemployment will, however, remain at just under 10% for the remainder of the year, and the majority of economists are of the view that unemployment will not begin to fall substantially until 2016 at the earliest.

The AP survey, which canvasses the views of 42 economists, suggests that the US economy will grow by 3.2% this year, a good half-a-percent above the forecast made by economists last October. Consumer spending will be 3.2% higher in 2011 than in 2010, but inflation is expected to remain stable at 1.8% this year, just 0.3% higher than last year, the survey finds.

Meanwhile, 2.2 million additional jobs will be created in 2011, the economists predict. This compares favourably to the 1.6 million jobs that economists expected to be created this year in last October's survey.

The recently-enacted package of tax cuts, coupled with rising stock prices and easier access to credit are among the key drivers of US economic growth in 2011, the economists said.

The results of another survey, by the National Association of Business Economics (NABE), are broadly in line with the conclusions of AP's poll, and would seem to confirm that optimism among employers is higher now than for a number of years.

“NABE's January 2011 Industry Survey confirms that the underpinnings of the US economy continue to strengthen,” said Shawn DuBravac, Consumer Electronics Association.

"The number of firms expressing positive hiring plans is at a level not seen in over a decade — a sign of improving labor-market dynamics. Supporting these hiring plans, industry demand continues to move higher, and profit margins are expanding," DuBravac added.

One-in-five respondents to the NABE survey expect economic growth between 3% and 4% this year, although the majority (62%) anticipate more moderate growth of 2% to 3%. Firms also appear to be putting in place plans for higher capital spending.

The January 2011 NABE Industry Survey report presents the responses of 84 NABE members to a survey conducted between December 17, 2010, and January 5, 2011, on business conditions in their firm or industry and reflects fourth-quarter 2010 results and the near-term outlook.

The survey found that profit margins expanded for a sixth quarter in a row as 38% of panelists reported that margins rose at their firm, versus 18% who reported declining profitability. The nearly 21-point spread between the two responses was the highest since the fourth quarter of 2005.

About one-third of respondents (34%) reported having larger workforces compared to only 13% a year earlier. The share of firms increasing their capital spending from the previous quarter rose slightly from the prior survey to 38%, while only 6% of panelists reported cutbacks in their firms.

However, the survey found that the cost of materials continues to rise and the percentage of respondents reporting rising prices outpaced that of respondents reporting price declines, but not to the percentage highs seen in 2008.

Views on the 2011 tax package were mixed. While over half of the respondents (53%) expect the tax cuts to translate into higher sales, especially for goods, 60% felt that new tax policies would not influence their investment plans.

"A majority of respondents anticipate no increase or decrease in investment spending or employment in response to new tax policies, suggesting business decisions are being driven by the fundamentals of an improving economy,” added DuBravac.