4 Reasons to Be Optimistic About 2011

Read more in our Case for Optimism series here.

Large corporations have the means and motive to hire. Small companies are starting to see credit thaw to help them buy new machines and new workers. Consumers are opening their wallets, and leading indicators are looking up. Heck, Goldman Sachs is getting excited about the next two years, shouldn't you?

Yes, you should!

But if the recovery is ready to fly, there are some important strings holding it down. We still don't know what taxes will look like in 2011. We still don't know if the Euro zone will implode in 2011. We still don't know what the US housing market will do in 2011. Yes, there's enough cold water to douse our optimism with harsh reality. But let's count the reasons to be hopeful for the new year.

1. Big Corporations Are Ready To Hire

We added more jobs in October -- 160,000 net gain -- than any month in half a year. And there's reason to think healthy hiring will continue into 2011. Why?

Two graphs tell the story. First, productivity growth is slowing down, which means workers have been wrung dry and employers will have to add jobs to increase output. Check out the fall-off in worker productivity in the last year and a half:

productivity growth 2010.png
Second, companies have the means to correct for flat-lining productivity by engaging in an exotic and nearly forgotten business activity known as: hiring. Large non-financial companies are sitting on nearly $2 trillion in cash, and their revenues are rising. Four in five firms in the S&P 500 saw growing revenue in the last three months they reported (see graph below). The conditions are ripe for big firms to break out their wallets.

revenue 2010-q3.png

Dose of reality: You probably heard the news that corporate profits just had their best three months ever. But when you dive into the numbers, a more sophisticated, less gleeful, story emerges. Justin Fox explains that when you take away financial companies and firms that make most of their cash overseas, profits are nowhere near record levels as a share of national income. In other words, if you're a small or medium-sized company that isn't a bank, things might be improving, but not fast.

2. Small Companies Are Ready to Invest

Economists see glimmers of hope in the struggling small business scene, with warming credit conditions feeding pent-up demand for capital goods (machines used to build other goods) and workers.

As we wrote here, Ian Shepherdson, chief United States economist at High Frequency Economics, has been an economic bear for the last five years. Banks have been reluctant to lend to small firms, which means small firms employing half the country's labor force have struggled to expand. But that's changing, he said.

"Credit contraction seems to be coming to an end," he told the New York Times' Gretchen Morgenson. "Over the next 12 months I think we will see a transition out of a sluggish 2 percent economy to a real, properly growing recovery. And the second half of 2011 may be the true turning point for unemployment."

If the credit expands at the pace Shepherdson predicts, the economy could grow by 4 percent in the second half of 2011 and we could achieve normal credit and growth conditions in 2012.

Dose of reality: Small businesses often rely on community banks, and community banks are still suffering mightily, Biz Times reports. The FDIC's list of "problem banks" with the highest risk of failing grew from 829 to 860 -- or one in nine -- due to lingering real estate deals, according to the latest November report. Ongoing crises with the housing market and European debt will continue to weigh on banks' balance sheets, which will make them loathe to lend to risky small businesses.

3. Consumers Are Ready to Consume

The holiday season is make-or-break in retail, and 2011 is off to a roaring start. Holiday hiring in retail is the best in four years. Black Friday online and in-store shoppers increased 9 percent over 2009, according to two reports. Web spending in November rose 14 percent on the Friday and Saturday after Thanksgiving, and Monday was a record day for online sales.

On the back of this most wonderful news, Goldman Sachs economists released an optimistic report that "represents a fundamental shift in the thinking that has governed our forecast for at least the last five years." Let's check out the thesis:

In a nutshell, it is because underlying demand has strengthened significantly. After a deep downturn from 2007 to mid-2009 and near-stagnation from mid-2009 to mid-2010, underlying demand is now accelerating sharply ... on track for a 5% (annualized) growth rate in the fourth quarter.

Families and companies worked hard to repair their balance sheets, and all indications are that they are ready to spend again. Higher spending will improve company revenue, which in turn creates more jobs. While state and local governments have struggled to balance budgets in 2009 and 2010, Goldman expects that the comeback of the American consumer will increase sales tax revenue that will support government jobs that are currently at risk.

Dose of reality: Don't expect a V-shaped recovery. Goldman still expects unemployment to stay over 9 percent for all of 2011 and to fall to only 8.5 percent by the end of 2012. As government stimulus winds down, the private sector will be able to pick up some of the slack. But many states are still projecting deep 2011 deficits, and we can't expect a GOP-led House to bail them out.

4. Green Shoots Everywhere! (If You Ignore Housing)

Across the board, monthly indicators for companies and consumers are looking up. Dan Indiviglio, Atlantic associate editor and business writer, took a close look at 16 key indicators ranging from personal income to manufacturing sector growth. Two-thirds of the indicators posted improvements in November, and the most significant exceptions were in housing. The upshot is that even as foreclosures and slow home sales hold back banks and real estate-dependent economies (Florida, Arizona, etc), communities and businesses relatively insulated from housing weakness will continue to post strong gains throughout 2011.

month in review 2010-10.png

Dose of reality: I know, I know. Saying "The economy is looking up, except for the entire housing industry, mortgage investments, and big ticket purchases," is like saying, "I loved the movie, except for the acting." It's safe to say that in this fledgling recovery, companies and families are looking to spend on small, safe items.