Comments on the Economy in 2011

My outlook for the year is one of continuing moderate growth.

The recovery has been going now for six quarters. In the fourth quarter of 2010, we built some reasonable momentum, and I think there's an argument that that momentum has carried over into the early stages of 2011 and actually augurs well for the economy to continue to grow this year.

There are certainly headwinds that continue to restrain the pace of recovery: the overall uncertainty, the general atmosphere of uncertainty; the interplay between the housing sector, particularly house prices and the consumers' attitude toward spending; and the process of repair of the credit system of the country.

If I were to list the aspects of this general environment of uncertainty, which I would say persists into 2011, some of the things I would cite would include, first, the general economy.

Secondly, at a global level, we have, in a way, the renewal of the European sovereign debt problems that have caused a lot of concern in this country in capital markets and in the banking sector.

Thirdly, the question of regulation. I hear from many companies that the cost of compliance is a weight on their ability to grow and to hire.

Another aspect of uncertainty would be the direct effect of the health care legislation. Many companies continue to cite that as something they're not yet sure of, and [that] inclines them not to hire full-time workers.

So those are some of the things that weigh on the minds of business people. I would say that generally the business community remains cautious—cautious about hiring and to some degree cautious about at least investing for growth.

Housing sector
The housing market is unlikely to improve dramatically in 2011.

I think factors that are going to keep improvement of the housing sector slow include stricter underwriting standards for new mortgages or for refinancing. A second would be the continuing process of foreclosures, which I think still has some time to run. A third element would be the high level of inventory of homes for sale that is affected by the foreclosure process and affected by the whole process of short sales, for example. And the final would be the willingness of people to make big expenditures like purchases of houses.

There are various views of the outlook for prices, but many forecasters think prices still may decline a little bit or at best remain flat. And since the value of one's house is often a major part of the net worth that underpins consumer spending, I think this represents a headwind or to some extent an impediment to consumers feeling comfortable that they're ready to spend at a much higher level.

The household sector, and that means individual households as well, has been in a process of deleveraging, which is another word for saying paying down debt.

I expect this process of deleveraging to continue. I think there's still some way to go before the average American household is comfortable with their debt levels and comfortable with the financial security in light of the overall environment.

Credit markets
We're still experiencing something of a headwind as the credit markets continue the process of repair, and that will hold back the recovery or hold back the expansion of the economy.

Repair of credit markets is important to the economy and a key to a solid recovery because credit is in effect the fuel of the economy.

Well, much progress has been made in the credit markets. And by credit markets I mean both the banking sector and the credit capital markets. But the process of repair is not complete, and it will certainly take some more time for the country's credit markets to return to full health. And I think what that means is that credit flows into the economy are going to continue to be somewhat constrained as the institutions and the markets involved take more time to get into a healthy condition.

Conditions in the banking system I would describe as mixed. You know many banks have returned to reasonable health. They have recapitalized, for example, repaid government borrowings, and worked through a lot of write-offs. So in many respects, banks are in a much better position. At the same time, the FDIC's list of problem banks is still around 860, I believe, and we have more bank failures that are likely in 2011. So, overall, I would say the banking system is in a sort of mixed position.

In the broader corporate credit markets, both investment-grade and high-yield issuance was quite strong in 2010, and spreads were relatively narrow. And I expect those trends to continue in 2011.