Economy in 2011: Liftoff or Cold Shower?
January 17, 2011
The extra fiscal stimulus from the tax cuts late in 2010 could produce a 4 percent growth rate for the first half of 2011 -- a sharp turnaround from December's gloomy news on U.S. employment. However, China's overheating and Europe's sovereign-debt crisis continue to threaten the global recovery, says John H. Makin, resident scholar at American Enterprise Institute.
In addition, four risks could make liftoff difficult for the U.S. economy:
- Hostility in the new Congress to additional fiscal stimulus.
- Higher energy costs, which could offset the boost from the payroll tax cut.
- A housing sector under heavy stress.
- And fiscal drag from state and local governments as the federal stimulus wears off.
With a more favorable U.S. spending environment emerging, more substantial risks to the global recovery for the first half of 2011 appear to lie outside the United States, specifically in China and Europe, says Makin.
- A hard landing in China or a more intense sovereign-debt crisis in Europe would jeopardize U.S. growth nearly as much as the failure of Lehman Brothers in 2008 did.
- Stronger U.S. growth would help mitigate some of the problems in Europe and China.
Source: John H. Makin, "The Economy in 2011: Liftoff or Cold Shower?" American Enterprise institute, January 11, 2011.
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