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11 Forecasts for 2011

For almost 90 years, The Kiplinger Letter has helped subscribers look to the future with crisp, bold economic and political forecasts, based on the reporting, analysis, and interpretation of an experienced Washington editorial staff. We pride ourselves on the accuracy of our forecasts, knowing we can’t always be right. But our objective is to give our loyal readers the insights they need for sound business and personal planning. Here are 11 forecasts for 2011. Agree? Disagree? Please let us know with a reader comment below.


No Bid for Palin
Look for her Sarah Palin to announce sometime in 2011 that she won’t be a candidate. The decision will be all about money -- she’s making a ton of it speaking and writing. But it will also involve practical politics. It’s never easy to dislodge an incumbent, and if Obama wins again, the 2016 race will be wide open and Palin will be just 52.

Former Mass. Gov. Mitt Romney will be the immediate beneficiary. He has solid name recognition, but GOP-tilting Tea Partyers might have trouble accepting him as a true conservative and coming to grips with his Mormon faith. Among others in the mix: Ex-House Speaker Newt Gingrich; S.D. Sen. John Thune; and dark horses Gov. Mitch Daniels and Rep. Mike Pence, both from Indiana.

The wild card is former Fla. Gov. Jeb Bush. If he wants it, he’s the nominee. Expect a push to convince him to run, though we think he wait until 2016. Without Bush, Romney or Daniels will lead the field a year from now.


Hiring Returns
The economy will finally start to show more-robust job growth. Economic expansion since the downturn ended in mid-2009 has been so meager that net job creation has been barely enough to absorb newcomers to the labor force, which grows by over a million each year. The result: A jobless rate lingering near 10%. With GDP growth of about 3.5% in 2011, the outlook will begin to improve. Look for employers to add about 2.5 million folks to their payrolls next year. By year-end 2011, the unemployment rate still won’t be much below 9%.

Falling Housing Prices
Housing prices have further to slide -- an additional 4% or so, on average, across the country. The problem is the huge number of distressed sales still to come. By fall -- a leveling off, on average, with spotty areas of price increases that will gradually spread in 2012. Solid sales are already firming property values in a few spots: the Washington, D.C. suburbs, for example, plus San Francisco and other coastal cities in California. But inland California, parts of Florida, Phoenix, Las Vegas and Atlanta, among others, will remain stuck in the throes of the housing collapse.

Hope for the Deficit
A turning point in the battle over the federal budget deficit will come in the fall. Odds are that it won’t look like much: A slim majority of federal lawmakers will agree to slight reductions in spending on some domestic programs and defense outlays. The small step will be symbolic, marking a shift from the “have it all” attitude that has prevailed for much of the past few decades. It’ll be at least 2013, though, before Congress truly ends its penchant for cutting taxes and increasing spending and starts to grapple with the tough choices needed to reduce the huge national debt.

Good Times for Stocks
Look for the Dow to top 12,500 by the end of the year, with the rally likely to continue into 2012. Total return for Standard & Poor’s 500 stocks: 7%-10% with dividends -- versus about 15% in 2010. That’s in line with broad market averages over the long term but significantly off the 26.5% growth in the 2009 rebound. Earnings will likely remain strong, with corporate profits surpassing 2006 records. Many stocks in the S&P 500 are well priced, despite the 93% gain since March 2009.


A More Muscular Dollar
The U.S. dollar will strengthen as euro zone finances continue to sour, bringing lower prices for imported goods but boosting the cost of exported products. We see the euro zone debt crisis leading western Europe back into recession as Portugal and perhaps Spain join Greece and Ireland in seeking bailout assistance from the European Union and the International Monetary Fund. The biggest losers: Small countries with the biggest deficits. But Germany and France will also be dinged. A default by one or more countries could hamper global economic recovery. But the odds of that, and the new banking crisis that might result, are slim.

Oil's Rise to Be Tempered
Oil prices aren’t likely to top $100 per barrel next year, in our judgment. The price of West Texas Intermediate crude on the New York Mercantile Exchange ended 2010 on a high note. It rose nearly $20 per barrel in the last two months since the Federal Reserve began its second round of quantitative easing to stimulate the economy. The move put pressure on the dollar, and since oil is sold in dollars, drove up prices. Signs of an improving economy are sure to lead the Fed to slow its program, beefing up the dollar and slowing the rise in prices. Look for oil to go over $95 a barrel ahead of the summer driving season and then fall into a trading range between $85 and $95 for the rest of the year.

Progress for Alt-Energy
Wind power and solar power are poised for big breakthroughs next year. A network of federal and state partnerships led by the Department of the Interior will find and designate “wind energy areas” where offshore wind power projects can be set up quickly without harming the environment or fishing and boating zones.

Expect announcements soon of offshore wind sites on the East Coast -- off of Maryland, New Jersey, Virginia, Rhode Island and Massachusetts. Because the government is vetting the sites, investors can begin projects with less fear of regulatory unknowns and lawsuits. Solar installations are also going like gangbusters. In the coming year, a first: More than 1 gigawatt of new solar generating capacity will come on line. That’s equal to a large nuclear plant and enough to power 800,000 homes.


Bye-Bye, Banks
About 100 banks will fail next year, fewer than in 2010, but a lot more than in years leading up to the Great Recession. Smaller banks are most vulnerable, as most troubled big banks have already been taken over. The number of banks on the problem list will also decline in 2011 -- 860 were troubled in the third quarter.

So Long, Saturday Mail
The U.S. Postal Service is poised to halt Saturday delivery, perhaps as soon as October, the start of Uncle Sam’s fiscal year 2012. The move will save the Postal Service $3 billion a year, a good start to stanching the flow of red ink -- a net $8.5-billion loss in 2010 alone. The move is expected to result in a major scaling back of the postal workforce. Large distribution centers will continue to process mail seven days a week, making sure it gets to outlying facilities for timely Monday-through-Friday deliveries.

No Progress in Afghanistan
The war in Afghanistan will grind into its second decade with no end in sight, as the Taliban bides their time.

The White House has said over and over again that the July 2011 date for beginning to bring U.S. troops home from Afghanistan does not mean that Western forces will leave the country entirely anytime soon. But the militants still take it as proof that they have more patience than the U.S. They’re convinced that U.S. civilian support for the war will crack before they do.