The U.S. economy is widely expected to continue its recovery from the worst financial crisis since the Great Depression which indeed led the economy into the worst recession since WWII, where the U.S. economy started to grow during the third quarter of 2009, and from that point the U.S. economy never looked back as it continued to expand though over a slow and a sluggish pace. 2010 will probably mark a recovery year for the U.S. economy, as seemingly the recession is indeed over, yet expectations over how long will it take for the economy to return back to its long term growth potentials still vary among analysts, yet most believe that the world’s largest economy will continue to shake off the aftermath of the credit crunch before it can meet its long term growth potentials in 2011. 

The Federal Reserve Bank expects the economy to recover over a gradual and a slow pace in 2010, while inflation is also expected to remain subdued, while unemployment is also expected to edge lower in 2010 inline with the expected recovery which is expected to continue through 2010. Moreover, the Feds are set to end several liquidity programs in 2010 including the MBS, Agency Debt purchases program. 

Gross Domestic Product is expected to expand in 2010 after contracting by almost 2.50% in 2009, where median estimates signal that the U.S. economy will be able to expand by an annual rate of 2.60% in 2010 and by 2.80% in 2011, though the Fed expects the U.S. economy to grow by an annual rate of 3.00% in 2010 and by 3.95% in 2011. 

As for inflation, the Feds expect inflation to remain well under control in 2010, where the Feds’ favorite indicator for inflation, core PCE is expected to rise by an annualized 1.25% in 2010, while CPI is expected to rise by an annualized 1.45% in 2010. 

However, expectations from major financial institutions around the globe signal that inflation will rise in the United States in 2010, where CPI is expected to rise by an annualized 2.05% and to continue rising through 2011 by 2.20%, while core PCE is expected to rise by an annualized 1.30% in 2010. 

The huge amounts of liquidity that were pumped into the financial system might indeed lead to an increase in upside risks to inflation, as inflation is a result of increased money supply, yet given that the velocity of money was still weak during the recession, we didn’t witness a strong rise in inflation rates, while adding to that the possibility that energy prices might continue to rise in 2010, we shouldn’t exclude the possibility of soaring inflation rates in 2010. 

Energy prices are still expected to remain rather stable in 2010, where median estimates signal that oil prices will continue to fluctuate around the $70s a barrel levels, yet as the recovery prevails and becomes more pronounced, production levels will increase drastically on a global scale and that will probably lead energy prices to increase as well.

Meanwhile, the Obama Administration has been working very hard over the course of this recession in order to avoid another depression, and accordingly fiscal stimulus plans were undertaken to help revive economic growth through stimulating spending, the fiscal stimulus was also able to create new jobs in the United States, while also helping in saving existing jobs, which without the stimulus plan would have been lost without any doubt. 

The Obama Administration proclaimed that the fiscal stimulus was indeed able in creating or saving more than 600,000 jobs, though median estimates are signaling that the fiscal stimulus was able to create or save around 300,000 jobs in 2009, yet despite all that unemployment continued to skyrocket in 2009 and continued to hover around its highest level in 26 years around 10%. 

Unemployment rose towards the end of 2009 to reach the highest level since 1983 at 10.2%, however, unemployment eased in November as employers eased the pace of layoffs as a result of improved economic conditions, but still unemployment will probably remain elevated for a couple of years, which means that we should still expect the economy to remain under pressure amid rising unemployment and tightened credit conditions. 

Unemployment s expected to remain around 10.00% in 2010 according to median estimates before it starts to fall and reach 9.00% in 2011, however, the Feds expect unemployment to drop in 2010 to reach 9.50%, while unemployment is expected to continue falling through 2011 to reach 8.40%. 

Elevated unemployment will surely affect economic activity in the United States, as growth in the United States depends mainly on consumer spending, where consumer spending accounts for nearly 2/3 of economic activity, and accordingly spending will suffer due to elevated unemployment levels. 

Employers in the United States are yet to start hiring new workers, noting that without the fiscal stimulus, unemployment would have surged far beyond 10%, yet employers have been easing the pace of layoffs towards the end of 2009, and we do expect U.S. companies to start hiring new employees over the course of 2010, yet the pace of jobs added is still expected to be weak at least during the first half of 2010. 

This should mean that consumer spending will remain generally weak through 2010; however, investments will probably support economic growth, as financial markets continue to show more signs of improvement and stability, and we should expect investments to rise further given that conditions remain stable. 

Another important issue for the United States is the rising budget deficit, as the budget deficit accounted for almost 10% of US GDP in 2009, however, estimates signal that the budget deficit will account for 9.10% of US GDP in 2010 and only for 6.75% of GDP in 2011. 

Moreover, the outlook for benchmark interest rates in the United States also signals that the Federal Reserve Bank will probably start hiking their interest rates somewhere within the second half of 2010, where median forecasts signal that interest rates will remain steady through the first half of 2010 at 0.25% before starting to increase through the second half to reach 0.75% during the final quarter of 2010. 

However, we should note that some financial institutions believe that the Feds will be forced into hiking their benchmark interest rates in order to battle upside risks to inflation, as expectations for interest rates through 2010 ranged among 0.00% to 3.00% by the final quarter of 2010. 

Interest rates though will probably remain steady through the first half of 2010, as we really don’t see how the Feds are going to starting hiking their interest rates with unemployment standing at such elevated levels, as elevated unemployment would indeed hammer economic activity, and starting to increase short term interest rates in such a condition might lead the economy back into recession, so unless unemployment starts to fall we don’t believe the Feds will undertake a Hawkish stance, noting that the Feds signaled that interest rates will remain at “exceptionally low levels for an extended period of time.” 

As for the U.S. dollar, median estimates signal that the U.S. dollar will weaken against major currencies in 2010, where the Euro is expected to rise against the U.S. dollar to reach $1.52 during the first quarter of 2010 and the pair is expected to continue hovering around the $1.50s level throughout 2010 before closing the year at $1.47 according to estimates, though with the ongoing difficulties, there’s still a chance the dollar might continue to lose value against major currencies including the Euro, where the pair might indeed try to retest the $1.60 levels once again and could even breach this level and reach a new record high during the first half of 2010. 

The dollar is also expected to drop against the British Pound, as the British Pound will probably rise on the back of a weak dollar, where median estimates signal the pair might rise to reach $1.68 through the final quarter of 2010 from as low as $1.66 during the first quarter, yet the range for the GBP/USD pair reflects the high uncertainty level for this pair in specific, where expectations signaled that pair might fluctuate between as low as $1.40 and as high as $1.95 levels through 2010. 

Also, the U.S. dollar is expected to rise against the Japanese Yen during 2010 according to median estimates, as the pair is expected to rise from 90 during the first quarter of 2010 to reach 96 during the final quarter of 2010, but we can also see that the range for the pair’s movement during 2010 is rather wide among 80 and 120. 

We don’t expect currencies to fluctuate heavily in 2010 or at least not as much as they did over 2008 and 2009, as financial markets have been stabilizing indeed over the course of 2009, yet still we believe the U.S. dollar will continue to weaken against major currencies through 2010, and accordingly we believe major currencies will be able to extend their rally against the dollar at least through the first half of 2010.

Meanwhile, we expect activity in the housing market to continue stabilizing through the first half of 2010, as recently activity has been showing signs of improvement, yet the housing market is yet to recovery fully from its worst slump since the Great Depression, as rising foreclosures, tightened credit conditions, and rising unemployment will probably continue to weigh down on activity in the housing market, though cheap home values and the ongoing governmental support through the tax credits for first time buyers will probably continue to ease the downside pressures and help the housing market activity, as we expect the housing market to start gaining some strength during the second half of 2010 as well. 

The services sector in general and the financial sector in specific will also continue to stabilize through 2010, as we started to see some expansion in the services sector during the last quarter of 2009, and this expansion will probably continue over the course of 2010, though it will probably take some time before we see a strong rise in activity for the services sector, while the financial sector should be able to stabilize further over the course of 2010, as banks will probably start to expand their lending to consumers and businesses, yet activity in the financial sector will be connected with the developments in the labor market, as the labor market will be a key to the recovery process. 

Stock markets in the United States have been rising ever since hitting their record lows back in March 2009, as ever since then investors almost never looked back and stock indexes have been enjoying a long lasting rally, nevertheless, we expect stock markets to undergo a correctional wave, but this correctional wave won’t be able to change the Bullish wave in stock markets, though some will argue about this issue in specific, as some would say that stock markets will enter a Bearish wave which is defined as a drop of 20% or more in an index. 

The correctional wave will probably take place during the first quarter of 2010, though no one can be really sure about the timing, however, we wouldn’t expect stock markets to rise drastically during 2010, as the U.S. economy is expected to continue its recovery though 2010 and that will stop equity indexes from rising noticeably. 

2010 is going to be a very important year in the history of the United States, as the worst recession since the Great Depression seems to have come to an end, yet the aftermath of this recession will continue through 2010, and it will probably take more time before conditions are back to normal, yet if the plan goes as planned and the recovery continues without any problems, we should be able to enjoy at least a better year for both Wall Street and Main Street, and things should only improve from that point on until we reach prosperity probably in 2011…

The U.S. economy is widely expected to continue its recovery from the worst financial crisis since the Great Depression which indeed led the economy into the worst recession since WWII, where the U.S. economy started to grow during the third quarter of 2009, and from that point the U.S. economy never looked back as it continued to expand though over a slow and a sluggish pace.

ecpulse.com