When will the economy finally stop trudging along? It's the question I get most often and the one that increases in frequency as we approach year's end. While I have no certain predictions for 2014, I am cautiously hopeful. There are both good and bad indicators when it comes to the current economy, and all of them will impact recovery. Let's take a look at where we stand.
The good news for 2014 is that we are poised for growth. The basic underlying economic fundamentals – growing GDP, credit availability, and job creation – are stable. As such, confidence levels have risen dramatically over the last 12 months. That is a good indication that the economy is improving. Mainstream estimates, like those from the Federal Reserve, predict U.S. economic growth will rise to around 3% in 2014, significantly higher than the 2-2.3% range concluded for 2013. And, according to multiple surveys, CEOs are committed to job creation as they prepare for a coming wave of growth, particularly in the oil and gas, automotive, and technological industries.
But will that growth actually come? The bad news for 2014 is that we have seen good news before. The unfortunate pattern for the past few years has been to project improving growth in the year ahead, and then scale back those projections when the brighter future does not arrive. Yes, there has been an element of bad luck to the economy in recent years – the eurozone crisis in 2010 and 2011, fiscal pullback in American state and local governments in 2010-11, and federal government tightening in 2012-2013 – but most of those were foreseeable and should have been added into economic predictions. I believe there is something more fundamentally wrong with the economy than just bad luck. First, Washington is toxic. The sequester and government shutdown contributed heavily to a slower GDP growth this year, and the federal government will continue to be a fly in the ointment if it doesn't get its act together. Remember, funding to keep the U.S. government running has been authorized only through January 15th, and the debt ceiling lifted only through February 7th. Will there be another shutdown? Maybe not, but that decision will likely go down to the wire, and the continued uncertainty about government spending, Obamacare, and other public policies will put a damper on investment and hiring. Second, the Federal Reserve is approaching a phase-out of its $85-billion-a-month bond buying program. In anticipation, long-term interest rates will continue to rise, putting a damper on mortgage applications. Lastly, we just don't know what we don't know. Will there be another oil price shock? Premature tightening by leading banks? We certainly don't need any surprises next year.
Benefitting 2014 is the fact that known challenges are already priced in. U.S. government spending cuts and tax hikes – likely not to occur again in 2014 – have already taken place. Emerging markets, though continuing on just a moderate growth path, don't seem likely to collapse. Europe's problems may have finally bottomed out, and its sense of acute crisis has long passed. The foreseeable things that dragged down growth the last few years are unlikely to recur, and the natural resilience of the U.S. economy could drive the kind of expansion embedded in projections from the IMF, the Fed, and new OECD numbers. In other words, a full-throttled recovery has to happen eventually. Will it be 2014? Keep your fingers crossed and prepare for any scenario.
