U.S. ECONOMY POISED FOR GROWTH
Although not back to normal, the fundamentals of the U.S. economy are positive, and continued growth is likely. The Congressional budget deal in December 2013 eased both consumer and business concerns, decreasing those political headwinds for 2014.
What’s Next? Cautious optimism fuels modest expansion:
- Look for Growth. GDP will increase 2.5% – 3.0% during 2014. Expect some volatility as both businesses and consumers remain wary of challenges that threaten to derail the recovery.
- U.S. Fundamentals have Significantly Strengthened. Factors from the housing recovery and a much stronger banking system to reduced consumer debt point to an ever-broadening economic base. This shored foundation should support a full recovery over the next 3-4 years.
- The Jobs Market is Slowly Improving. Despite a disappointing 74,000 jobs added in December, 2013 delivered continued improvement. November, much more robust than its successor, brought in around 203,000 jobs. The good news, in addition to the quantity, is the quality. An increasing number of sectors are adding positions and creating more “good” jobs.
- Business Confidence is Up. Business seems to be shaking off the political economy and other uncertainties, albeit slowly and fitfully. Profit margins are strong, and businesses continue to sit on a lot of cash. If the debt ceiling issue is resolved pragmatically by Congress, it is likely to spur more expansion and investment.
- Consumers are Spending. Sentiment varies across wage and asset levels. Lower income consumers remain cautious and are particularly vulnerable to political wrangling in Congress. At the same time, debt levels are down and sentiment is increasing across the board, particularly for those who are seeing wage increases, good new jobs, and rising housing equity.
- Low Inflation Persists. Inflation moved between 1.1 to 2% during 2013. Expect the same in 2014. For sustained inflationary growth there would need to be a substantial rise in wages which is not on the horizon.
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Despite the good news, uncertainties remain that will moderate growth. If they turn sour, these challenges could cause major problems.
- Higher U.S. Currency Valuation Dampens Exports. As the U.S. returns as an engine of growth, the currency will rise against others. If the valuation is too high, it could significantly affect exports, which have been a driver of what little economic growth the U.S. has sustained for the last 4 years.
- The Great Unwinding. The Fed must now unwind its fiscal stimulus. There has never been a program of this kind, so the best way to do this is, as yet, unknown. Having chosen an incremental approach, the Fed believes it can maintain control. The commitment to keep interest rates low beyond a better employment rate mitigates risk.
- Long-Term Effects of Great Recession. As far as we know, the Great Recession has not done major lasting damage to the economy. Because there are likely impacts that cannot be seen clearly today, it will take a couple of years to truly identify the long-term effects of the downturn.