Economists See Signs of Stronger Recovery

WASHINGTON — Eighteen months after the recession officially ended, the government’s latest measures to bolster the economy have led many forecasters and policy makers to express new optimism that the recovery will gain substantial momentum in 2011.

Economists in universities and on Wall Street have raised their growth projections for next year. Retail sales, industrial production and factory orders are on the upswing, and new claims for unemployment benefits are trending downward.

Despite persistently high unemployment, consumer confidence is improving. Large corporations are reporting healthy profits, and the Dow Jones industrial average reached a two-year high this week.

The Federal Reserve, which has kept short-term interest rates near zero since the end of 2008, has made clear it is sticking by its controversial decision to try to hold down mortgage and other long-term interest rates by buying government securities.

President Obama’s $858 billion tax-cut compromise with Congressional Republicans is putting more cash in the hands of consumers through a temporary payroll-tax cut and an extension of unemployment insurance for the long-term unemployed.

It is also trying to address one of the biggest impediments to the recovery — the reluctance of companies to invest their piles of cash in new plants and equipment — by granting tax incentives for business investment.

The measured optimism is reminiscent of the mood a year ago, when the economy seemed to be reviving, only to stall again in the spring amid widespread fears caused by the debt crisis in Greece and other European countries.

Even so, economists are increasingly upbeat about the outlook, saying that while the economy in 2011 will not be strong enough to drive unemployment down significantly, it should put the United States on its soundest footing since the financial crisis started an economic tailspin three years ago.

Phillip L. Swagel, who was the Treasury Department’s chief economist during the administration of George W. Bush and teaches at the University of Maryland, said, “The recovery in 2011 will be strong enough for us to see sustained job creation that will finally give Americans a tangible sense of an improving economy.”

A prominent forecaster, Mark Zandi of Moody’s Economy.com, predicted that the economy would be “off and running” next year. “The policy response, in its totality, has been very aggressive,” he said, “and I think ensures that the recovery will evolve into a self-sustaining expansion early in 2011.”

The recession officially ended in June 2009, when the economy started to grow again. Gross domestic product, the broadest measure of the country’s output, grew at an annualized rate of 3.7 percent in the first quarter of this year. But then it stalled, with the rate falling to a mere 1.7 percent in the second quarter and 2.6 percent in the third quarter.

Jan Hatzius, the chief United States economist at Goldman Sachs, said the economy was likely to grow at an annualized rate of around 3 percent this quarter. Goldman projected last week that the growth rate would be 4 percent for most of 2011. Morgan Stanley, which raised its growth forecast for 2011 to 4 percent, is even more optimistic, forecasting a rate of 4.5 percent this quarter.

Administration officials, who have been burned by premature optimism in the past, were reluctant to make predictions for next year. But Austan D. Goolsbee, the chairman of the Council of Economic Advisers since September, said that a shift in sentiment quickly followed the news of the tax deal

“There aren’t many policies which, on the day Washington announces them, lead most private-sector forecasters to publicly and significantly revise their forecasts upward,” he said. “This one did.”

There are significant caveats to the more positive outlook. The housing market remains weak, and another sustained drop in prices could badly undercut the economy. Financial markets and the banking system remain vulnerable to a new round of jitters in Europe over the debt burdens of countries like Ireland and Spain. There is mounting concern about the tattered balance sheets of state and local governments.

While fiscal and monetary policy seems to be helping the economy in the short turn, the tax-cut compromise essentially deferred looming battles over how to cut federal spending and address the government’s huge debt burden.

The Fed’s bond-buying efforts have not prevented long-term interest rates from rising — a phenomenon that is interpreted by optimists as a reaction to higher growth and by pessimists as a demonstration of the ineffectiveness of the central bank’s efforts and the potential for inflation.

And for most of the roughly eight million Americans who have lost their jobs since the recession began in December 2007, it hardly feels like a recovery.