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Economic Forecasts

Economy Is Growing at a Solid Clip

Consumers are rejoining the action after a dismal showing last year.

We now expect the economy to grow by about 3.5% this year, a rate that’s still well below the typical postrecession surge of 6.5% or so. But it’s a solid, sustainable pace. And it’s a whole lot better than last year’s 2.4% decline in GDP.

Consumers and businesses are buying again. A close look at the good news of a 3.2% pace of economic growth in the first quarter reveals the really good news: Final sales to domestic purchasers -- which don’t include inventory buildups or trade -- rose at a 2.2% annualized pace. That’s the second best showing in three years and up from the 1.4% rate in the fourth quarter of 2009, when GDP overall was growing by 5.6%. It signals a genuine pickup in U.S. consumers’ interest and ability to buy and indicates that businesses are no longer simply restocking bare shelves, but investing in new equipment and moving product out the door.

Total consumer spending, which accounts for more than two-thirds of GDP, increased 3.6% in the first quarter, more than double the 1.6% gain posted in the previous quarter. In 2009, household purchases dropped 0.6%, the biggest decline since 1974.

A modestly improved housing market also will be a plus this year. Although residential construction won’t take more than baby steps until 2011, the sector won’t subtract from GDP this year the way it did from 2006 to mid-2009. But spending on commercial construction such as office buildings and shopping centers will remain a drag on growth through this year.

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Although exports will grow about 14% this year, adding to GDP, the increase in imports will be even greater. So trade will be a net negative for the U.S. economy. Little change is likely in the contribution from government spending. Uncle Sam will spend a bit more, but cash-squeezed state and local governments are cutting back.

Beneath the overall growth numbers, an unusual pattern is emerging, as smaller cities are seeing improvement before many of their bigger cousins. Steve Cochrane, an economist who specializes in regional economic analysis for MoodysEconomy.com, says this isn’t typical and cites two reasons for it: First, the housing boom and bust largely bypassed small to midsize cities, which shortened their recession and enabled a faster recovery. Second, manufacturing is leading this recovery and “the nation’s manufacturing base is largely in small to midsize metros.”

About two dozen larger metro areas, including Denver, Houston, Dallas, St. Louis, Pittsburgh, Boston and Buffalo, N.Y., have put the recession behind them, according to MoodysEconomy.com. Nearly 200 smaller cities -- those with populations of less than 1 million -- are firmly on the road to recovery. They are spread across all regions of the country and include such diverse metro areas as Huntsville, Ala.; Peoria, Ill.; Chattanooga, Tenn.; Billings, Mont.; Fort Collins, Colo.; Ithaca, N.Y.; Raleigh, N.C.; Salem, Ore., and Sheboygan, Wis.