Who Will Prosper in 2011

For some Americans, things are starting to feel normal again.

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The worry lines are finally starting to fade.

After 18 months of a stutter-step recovery, the economy seems to be gathering steam. Most companies that survived the recession are lean and profitable, and there's a good chance they'll begin hiring again in 2011. Consumers who have jobs feel better about their prospects, which means they'll be more comfortable spending money. The latest stimulus and tax-cut plan out of Washington is surprisingly meaty, with the impact likely to be felt in many American households. "Despite threats, 2011 is shaping up to be a better year for the U.S. economy," writes economist Mark Zandi of Moody's Analytics, who predicts healthy growth in 2011 of nearly 4 percent. "After three years of recession and weak recovery, the change will feel significant."

[See 20 companies that cratered in 2010.]

The benefits will be spread unevenly, however, and high unemployment will be a huge, nagging problem. Many Americans may simply live in the wrong region or work in the wrong industry, which will keep them out of the job market or cause them to miss the updraft that lifts the overall economy. Here's who's likely to benefit the most from positive economic trends in 2011:

Stock investors. Perhaps the biggest beneficiary of bailouts and stimulus programs has been the stock market, which has surged since early 2009 thanks to deep corporate cost-cutting, record profits, and the Federal Reserve's "quantitative easing," meant to drive investors out of safe assets like government securities and into riskier assets like stocks. Since March 2009, the S&P 500 has soared by about 85 percent—and the rally could continue throughout 2011. Stock movements are notoriously hard to predict, and a financial shock or other ugly surprise could deflate the market. But many Wall Street analysts believe stocks may still be undervalued, despite all the repair work companies have done on their balance sheets over the last two years. Bank of America Merrill Lynch, for instance, predicts that the S&P 500 will rise another 13 percent or so in 2011. More conservative predictions still call for 5 to 7 percent gains.

[See what QE2 has done for you.]

There's a floor of sorts to stock prices at the moment, since the Fed is trying mightily to help companies recover from the recession, so they start hiring again, and to help ordinary Americans rebuild their investment and retirement portfolios. So the Fed is likely to continue with quantitative easing, and keep interest rates at rock-bottom lows, until it feels the economy is recovering on its own. Since the first quarter of 2009, in fact, the Fed has helped Americans recover about $6 trillion worth of lost wealth, virtually all of that through gains in financial portfolios. Since household net worth is still down about $9 trillion, or 14 percent, from the peak levels of 2007—all of that due to falling home values—the Fed plans to stay on the case indefinitely.

Multinational U.S. companies. Another reason stock indices like the S&P 500 have skyrocketed is strong growth in developing economies like China, India, and Brazil. Such "emerging markets" are riskier than the developed economies of Europe and the United States, but companies with sales or investments there, such as IBM, Microsoft, Hewlett-Packard, and Boeing can also earn much higher returns than in the developed world. Companies in the S&P 500 index, for example, earn about 40 percent of their pre-tax income from emerging markets, which helps explain why corporate profits have soared and stock prices surged, even though the U.S. economy has been weak. American companies with a strong overseas presence tend to be more stable than companies with a regional focus, which is good news even for local employees who never travel abroad.

[See who will struggle in 2011.]

Workers in growing industries. Healthy companies in stable industries are starting to get back to normal, with profits up and hiring beginning to resume. Healthcare is probably the most well-known recession-resistant industry, with hiring up in virtually every field even during the recession. But other industries like energy, mining, Web publishing, high-end IT work, public transportation, and even waste management have been growing as well. And other industries that cut back during the recession—such as retail, hospitality, and warehousing—are starting to replace some of the jobs lost.

It's vital to work in a growing industry because that's where the opportunities for promotions, career advancement, and raises are likely to be concentrated. The recession caused the temporary contraction of some industries, which will bounce back as they have after other downturns. But it also accelerated the long-term decline of industries like textiles, print publishing, and lower-end information technology. And industries like construction were hit so hard that it will still be years before hiring returns to meaningful levels. In shrinking industries, it will continue to feel like a recession, with ongoing layoffs, scarce raises, and few opportunities to get ahead.

[See 20 industries where jobs are coming back.]

Taxpayers. The recent tax deal negotiated by President Obama and Congressional Republicans lowers taxes for Americans at every income level, by keeping income tax rates where they are (instead of allowing them to rise, as the prior law would have done), cutting other taxes like the Social Security withholding, and extending other tax incentives. For a family with income between $50,000 and $75,000, that adds up to an annual tax savings of $2,260, on average, according to the Tax Policy Center. For an average family earning between $100,000 and $200,000, it's a $6,212 windfall. That's a big chunk of change that will make a difference for many families. But don't get used to it. It's a near certainty that taxes will rise at some point, to help pay down the ballooning national debt. Taxpayers probably have until the 2013, at least, before federal tax hikes become a serious possibility.

Savers. The Fed's efforts to push interest rates to historic lows have slashed costs for borrowers, but they've also crushed savers dependent on interest income. Savers may finally start to feel a little relief in 2011. Interest rates have started to creep upward from low points reached in early November, and most analysts expect a modest rise in Treasury rates in 2011, which in turn will raise interest rates on some savings accounts and perhaps boost the return of fixed-income investments. Once the economy is healthy again, the Federal Reserve will start to raise short-term rates, which will directly affect savings accounts. That doesn't seem likely until 2012 or 2013, but if growth is better than expected, it could happen in 2011. Plus, most forecasters expect inflation to stay very low for the next year, which is good news for those on fixed incomes.

[See why the tax deal could be Obama's salvation.]

Home buyers. The buyer's market will continue into 2011, with home prices likely to fall another 5 to 10 percent or so—but finally hit a bottom in many markets within the next 12 months. The recent uptick in mortgage rates has caused worries about buyers packing it in, but even if 30-year rates hit 5.5 or 6 percent, they'd still be low by historical standards. It's also possible that rising rates will motivate buyers who have been sitting on the fence, convincing them to make an offer instead of waiting for rates to rise even more. A bit of increased activity could also convince reluctant sellers to accept low-ball offers while they're on the table. And lending standards should gradually ease in 2011, making more buyers eligible for mortgages. It will be a long time before the overall housing market returns to normal, but buyers with solid finances, stable jobs, and a bit of gumption could get remarkable deals in 2011. Optimism needs to start somewhere.

Twitter: @rickjnewman