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Ten predictions for the 2010 economy

What would a new year be without a batch of predictions leading into it – especially when the economy is a top-of-mind issue?

Here’s a gleaning of predictions from financial forecasters.

What would a new year be without a batch of predictions leading into it – especially when the economy is a top-of-mind issue?

Here’s a gleaning of predictions from financial forecasters. They offer interesting and sometimes provocative views, and some of them will surely be wrong. If Michael Darda is right about GDP, then Gary Shilling will probably be wrong about Treasury bonds, for instance.

With that “buyer beware” label attached, here’s some financial food for thought:

1. The recovery will be stronger than the consensus expects. Michael Darda, chief economist at MKM Partners in Greenwich, Conn., is forecasting real growth in gross domestic product (GDP) to average about 4 percent for the six quarters that end in December of 2010, thanks in part to improved credit conditions. This also makes him an optimist on job creation. He says the US should start adding jobs early in the new year.

2. Consumer spending will grow about 2 percent. Asha Bangalore and other forecasters at the Northern Trust Co., say this isn’t anything to write home about. “Consumer spending will continue to be constrained by sluggish labor market conditions, reduction in net worth, and tight credit conditions,” they write. But it beats a decline in the arena that drives so much of economic growth.

3. Treasury bonds will perform well, but sell antiques. Economist Gary Shilling in Springfield, N.J., says the battered economy still faces deflationary pressures, because so much factory capacity is idle and so many people are out of work. He says reliable old Treasury bonds will do well as investors seek safety, as will some dividend-paying stocks like electric utilities. His “sell” list includes tangible assets from commodities to art and antiques.

4. Treasury bonds won’t perform so well. Many financial firms are predicting at least a modest rise in bond interest rates in 2010, as the recovery gains traction. A rise in rates tends to push down bond prices. The bear case for bonds: Governments will be issuing lots of new debts, while investors will be wary about rising rates and the rising risk of inflation.

5. Businesses will start investing … a bit. Forecasters at IHS Global Insight say new factories aren’t needed yet, in general. “But businesses are flush with cash, and we do expect increased spending on replacement investment to pull equipment purchases higher in 2010.”

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6. Commodity prices will move sideways. That’s another opinion from IHS Global Insight, based on its view of 2.8 percent GDP growth for the world economy (and 2.2 percent for the US). Even with China revving up to nearly 10 percent GDP growth, the firm doesn’t see another commodity boom getting under way just yet.

7. Central banks will remain in “accelerator” mode. Manoj Pradhan and fellow analysts at Morgan Stanley say the Federal Reserve and many central banks will focus for some time on continuing to provide monetary fuel for recovery from recession, such as low short-term interest rates. “We expect the BBB (bumpy, below-par, boring) recovery … to keep the AAA (ample, abundant, augmenting) liquidity regime in place for a while,” Pradhan writes. But he adds that inflation risks will begin to resurface in both developed and developing nations.

8. A bear market in gold? Maybe not. Economist Ed Yardeni says that gold, often viewed as a hedge against inflation, tends to move in tandem with government debt levels. So if the economy recovers, will that bode well for tax receipts and poorly for gold? Mr. Yardeni, who runs a research firm in Great Neck, N.Y., says not to worry too much about a sudden return to fiscal health. An omnibus appropriations bill for 2010 is laden with earmarks for new spending, he notes.

9. The US will outpace Europe and Japan. This forecast, from Moody’s, is based on expectations that the US recovery will gradually gather self-sustaining momentum, clocking 5 percent annualized growth by late 2011 and then retreating back toward a more typical 3 percent pace by 2013. Japan, by contrast isn’t seen getting its GDP growth above 2 percent for four years.

10. The rest of the US should take a page from Pennsylvania. OK, this is an observation, not a prediction. But economists at Wells Fargo Securities note that America’s jobs problem is not just one of quantity. It’s also the structure of where the jobs are in the economy. Some 2 million more manufacturing jobs have disappeared during the recession, and may not be coming back. Pennsylvania is a state once rich in manufacturing jobs that has increasingly been flexible enough to add education service-sector jobs to offset its losses. “Labor market weakness will persist for longer than we would like, but adjusting to new economic realities will smooth the transition from recession to recovery,” write John Silvia and his colleagues at Wells Fargo.