Leading indicators show that an economic recovery likely will take hold in 2010, although several challenges remain that could delay a solid rebound from the worst recession in a generation, an economist said Friday morning at IBJ’s annual Economic Forecast.

“These set of indicators have a pretty good history of not only calling recessions but also recoveries,” John Augustine, chief investment strategist at Cincinnati-based Fifth Third Bank, told an audience at the downtown Westin hotel. "And they’re calling a recovery now.” (See video interview of Augustine below.)

Stronger corporate profits, higher stock-market returns and growth in the nation’s gross domestic product are telling indicators that the country is on the cusp of a recovery, Augustine said.

The major stock indexes are up by double digits so far this year and investors are raising their expectations for corporate earnings. The third-quarter earnings season began Oct. 7, and investors will learn from company announcements during the next few weeks whether the economy truly is in the recovery stages.

In fact, corporate profits on average are expected to grow 20 percent next year, much better than the 7-percent norm. The U.S. GDP is expected to climb as well—2.4 percent in 2010, from an anticipated dip of 2.6 percent this year.

“We’re transitioning from extreme negative numbers to positive numbers,” Augustine said.

Yet, potential barriers exist. Among the biggest concerns are whether foreign countries will finance new debt and whether the enormous amount of stimulus funding from the federal government will lead to inflation.



China, Japan and the Middle East are the largest financiers of U.S. debt. Augustine expects the foreign support to continue, at least in the short term, because those countries need American consumers to start buying their goods again.

U.S. debt in 2009 is expected to account for 78 percent of the country’s GDP, tying it with India for the 14th highest percentage worldwide.

The federal government still has yet to release $600 billion in stimulus funds, which could further add to the deficit. Many economists fear the release of so much money into the economy might cause inflation. Some have even predicted inflation might shoot to 10 percent from near deflation now.

“You get so much money thrown at the economy that you get too much money chasing too few goods,” Augustine said.
 
In addition, consumer spending, which accounts for 70 percent of the nation’s GDP, is likely to increase slowly as consumers start saving more. Consumer spending already is at its weakest since WWII.

Trends Augustine foresees relating to the business community include slow rehiring, simplified business models, an emphasis on finding new growth markets worldwide and less leverage.

Any recovery could be slowed by the the federal government’s growing role in the private sector, he said. It already owns 60 percent of General Motors Corp., 34 percent of Citigroup, 10 percent of Chrysler, and is the world’s largest insurer, due to its ownership stake in American International Group Inc.

If the government’s involvement continues for too long, Augustine warned, the United States will begin to resemble Europe—where 1-percent economic growth, 9- percent unemployment and much less business formation is the norm.

This recovery, Augustine said, “is going to be about Washington.”