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even more employers of highly-educated workers, if other issues such as the burden of taxation are addressed.

Our logistics sector will benefit if national and international commerce continue to revive. Sectors that benefit when household incomes grow -- most notably retailing, travel, and entertainment -- should also firm up. We expect some stabilization or modest improvement in the construction sector, but the timing and extent of any recovery will depend on how rapidly excess residential and commercial space is absorbed by the market.

The United States is entering a period of stronger output growth and more pronounced gains in employment. Toward the end of calendar year 2010, indicators showed substantial growth in consumer spending, ongoing strong gains in industrial output, and increased capital spending. All these developments suggest the maturing of the initially-hesitant economic recovery. Positive forces that have been working to spur growth include the Federal Reserve’s maintenance of near-zero short-term interest rates; a pickup in export demand (stemming in part from sharp growth in the developing world); and the continuing benefit of earlier federal tax cuts and spending increases flowing through the economy.

At long last, the recovery process is bringing substantial improvements in consumer and business confidence, higher corporate earnings, and, through its effect on the stock market, higher household wealth. These positive developments have been reflected in faster growth of household and business spending. It is a safe bet that the improvement will continue, aided in part by the recent cut in federal payroll taxes.

The headwinds from continuing credit problems, the painfully slow workout of the troubled home mortgage situation, and fragile state and local government finances will continue to depress growth, as will European debt concerns and the potential for Middle East turmoil. Uncertainties about financial and health care policies will also weigh on confidence and output.

National labor markets have seen some modest improvement, with the unemployment rate drifting down from its peak and the job count beginning to increase. Businesses have been reluctant to hire until they are absolutely certain that the recovery will last, and the expansion of output has so far been primarily the result of gains in productivity and longer workweeks, not hiring of more workers.

Likewise, uncertainty and unease about the economic impact of federal policies remains a significant barrier to job growth. Apprehensive business leaders are reluctant to invest because of historically high and growing federal debt, rising federal spending without sufficient revenue to support the increases, and the looming prospect of increased taxation and costly regulation.


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