Last week: 2011 will be a better year than 2010. How much better remains to be seen. The Conference Board Leading Economic Index® for the United States increased in each of the last three months of 2010. Job growth was better in the final three months than it had been in the first nine months. And the economy is likely to get some benefit from the compromise on tax cuts and other stimulative changes enacted in December and set to go into effect in January. Still, the economy continues to sail into strong headwinds, including continued problems in residential and nonresidential real estate. Together with still quite low consumer confidence and an expected drop off in the rise in corporate profits (due to the lack of demand as well as minimal pricing power), the economy is still on a steep climb from a very severe downtown, a full year and a half after the recession officially ended.

THE SITUATION ABROAD

The debt problem and the attendant austerity measures to deal with it are big reasons why economic growth in the euro-zone is likely to be slower than in North America in 2011. To be sure, there are budget problems on the other side of the Atlantic. That’s one reason why growth expectations (some think it will grow as much as 4 percent) may prove too optimistic. Still, the industrial base in North America is on firmer ground, to judge by the relative Purchasing Managers’ Indices. In both regions, the biggest concern in 2011 is how much economic growth can be achieved. In Asia/Pacific, the concern is about potential overheating and avoiding inflation. That is a concern in some other emerging economies, chiefly in Brazil.

FACT OF THE WEEK

8.6 percent. In the five-month period ending in November, tax revenue climbed by 8.6 percent in California. Ohio (which by some measures saw a bigger fall off in revenue) experienced a 7 percent rise in November (year-over-year). Nationally, the increase was closer to 6 percent, compared with an almost 4 percent rise in GDP (roughly $2 trillion in spending versus about $14.7 trillion in total GDP). What is most significant is that revenue is picking up just as stimulus money is ending. States had received about $200 billion and are scheduled to receive another $50 billion over the next six months. The gain in revenue, along with further cuts in services, might sufficiently offset the reduction in aid to keep state and local budget gaps from getting worse. They are bad enough as it is.

QUESTION OF THE WEEK

Gasoline is going over $3/gallon this winter. Are home heating costs also going to hit the roof?

Global demand for crude oil may very well send the domestic price of a gallon of gasoline above three dollars this winter, and perhaps even closer to $3.50 before Memorial Day. Of course, the weather will play a role in terms of how demand for heating develops. Refineries typically cut back on gasoline production right now and pump up the output of heating oil. This process reverses in the spring and the result is usually some retreat in gasoline prices over the summer. If this turns out to be a mild winter, as some are now suggesting, an excess of supply could result in somewhat lower prices.

Homes and offices are generally heated through winter (and cooled in summer) by a combination of heating oil and natural gas. Consequently, prices of both tend to run together. But like a lot of today’s economic trends, this one is not following that typical pattern. In fact, the price of natural gas, which peaked at almost $14 per thousand cubic feet two winters ago, has actually retreated to less than $4 this winter. Moreover, the price of natural gas could be even lower next winter (again depending on weather patterns), and possibly exerting downward pressure on prices for gasoline.

What is beginning to happen is that “unnatural gas” is being found and exploited by new technology. While these sources, like shale oil, are more difficult to extract, there is a huge potential quantity (600 to 700 trillion cubic feet). However, the amount extracted (using horizontal drilling and “fracking” – hydraulic fracturing) remains to be seen. Still, extraction has already begun. In fact, shale oil production doubled — from 5 percent of all natural gas in 2007 to 10 percent. The result has been a drop in price, even as gasoline prices edge higher, as seen in the accompanying chart.

Continued exploitation might even drive the price down to $2 or about where it prevailed from the mid-1970s to the early 1990s. Whether that helps drive gasoline prices down is another matter. Still, more natural gas, and more hybrid engine vehicles on the road just might keep gas from approaching $4 a gallon in 2012. More economical wind and solar power, and more conservation just might keep the overall energy bill for the total economy in check. That would be positive for overall economic growth, and bring the inflated unemployment rate down a little faster.