Welcome to the second annual round of Hopeful Predictions.  This feature is my attempt to make a few educated guesses about the economy and the financial world.  Since the news and economy affects all of our finances to some degree, knowing what lies ahead is important.  I hope these predictions are useful in your endeavor to prosper.

Scorecard for my 2010 Predictions

Here were my 2010 Predictions:

• Housing Will Recover Slowly
• The Stock Market is Headed Up
• Incumbents will get Voted Out
• Electric Cars will Spark Change

Electric Vehicles only started selling in December, so there hasn’t been enough time or cars available to make an impact.  I still believe EVs are going to be a hit and a catalyst for change in the field of energy.  With $4 gasoline right around the corner and practical cars being released, I believe people are going to give EVs a serious look.

The rest of my predictions were pretty accurate.  The stock market had a great year and a lot of politicians were voted out.  The housing market is still in a funk and I believe that will continue for years.  Housing is still historically expensive based on real wages and problems such as the foreclosure robo-signing and government meddling are interfering with the recovery process.

Prices are Definitely Going Up

I don’t think we will see inflation as high as it was in 2008, but it’s definitely not going to be near the 1% the government is claiming.  Between the quantitative easing, weak dollar, recovering economy and global demand, the prices of most commodities are going up.  I also expect the prices for services, especially medical and education, to go up.  I expect the real rate of inflation (not the government’s bogus CPI) will come in somewhere around 5-8%.

The bad news is that income probably won’t keep pace, especially for the working class and the retired.  Another 5-8% doesn’t sound like much, but you will definitely feel it when you pick up groceries or fill your tank.  And, this is just for a single year.  The cumulative effect over decades is huge.

Government is Going Broke

I believe next year is the year the government is finally going to have to deal with their deficit spending and unfunded promises.  I predict a rash of municipal bankruptcies and other problems that force the issue.  Taxpayer’s budgets are stretched wafer thin and they can’t afford the massive tax increases it would take to bail out the government at their currently unsustainable levels of spending.  Something has to change.

The shoe is also going to drop on underfunded government pensions.  The city of Prichard, Alabama, which has been bankrupt since 2009, stopped sending pension checks to retired employees.  This could set a precedent for other bankrupt cities, such as Vallejo, California.  Even cities as large as San Diego and New York City are struggling with pension costs that are unsustainable.  Either reform has to come or disaster will soon follow.

Unemployment is Coming Down

In December, there were 103,000 new jobs created and the unemployment rate dropped to 9.4%.  Although this was good news, the jobs growth was much slower than expected.  In fact, it was barely enough to keep pace with the population growth.  Ben Bernanke of the Fed is warning everyone that at this rate, employment won’t recover for another 4-5 years.

Part of the reason for the poor December numbers is that the stimulus jobs the government created are starting to disappear.  And, December is traditionally a poor hiring month for the private sector.  I think we will see much better January numbers, because companies tend to hire after the holidays are over.  My opinion is that we are at the beginning of a slow employment recovery that will speed up in the coming year.

Companies have been running very lean staffs and banking record profits during the recession, but that’s going to change.  As orders go up and the economy recovers, companies will be forced to hire.  The bad news is that some industries will do much better than others.  The unemployment rate for construction workers is currently at 20.7% and I don’t see that dropping quickly.  I also think people in manufacturing, mortgage, real estate and the public sector will continue to have a difficult time finding jobs.

Stock Market is Going Up Again

Last year, the stock market had a terrific recovery year and I expect another good year in 2011.  I expect the market to cool a little and take a breather, but there are a lot of forces that will push it upwards in 2011.  Many stocks, such as Ford, are reasonably priced at their current levels, so increases in earnings should send them higher.  Finally, there is pent up demand for many items, such as cars and luxury goods that were put on hold during the recession.

There is a stock market indicator called the “First Five Trading Days”.  Whenever the first five trading days of the S&P 500 are positive, there is an almost 90% chance the entire year will be positive.  The first five trading days of this year, the stock market did pretty well.  I am hoping for gains in the range of 5-8% in the Dow and much higher gains for small cap stocks.

I hope 2011 is a prosperous and enjoyable year for you.

The Bottom Line

The bottom line is that predictions are only guesses and it’s just as easy to be right as wrong.  But, approaching your future without a guess is like wandering through the desert; vision is necessary to reach a destination.

“The best way to predict the future is to invent it.”

Alan Kay – American Computer Scientist

Recommended Reading

Len Penzo – The Magic 8 Ball makes it’s Predictions for 2011
Financial Samurai – Financial Samurai Predictions for 2011
Go Banking Rates – Outlook 2011: This Year’s Financial Forecast

This post was featured on the Carnival of Personal Finance over at Wallet Blog. If you aren’t familiar with the Carnival of Personal Finance, you need to check it out. It’s the greatest carnival on the net.

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