The Economic Outlook for 2014

“In the business world, the rearview mirror is always clearer than the windshield” – Warren Buffet.

Now that we are nearly two months into 2014 what does the year ahead have in store and how will it impact you? Forecasting is more art than precision, however, having an idea what the American economy is likely to do will help you see more clearly the opportunities and challenges ahead.

Greg Ip  of the Economist, proposes that America will “enjoy a solid cyclical recovery in the year ahead”.  Although things are looking up, several speed bumps remain. Although improving US households are still scaling down their level of debt, the Federal Reserve has interest rates at zero, and fizzling European uncertainty still could impact the US’s growth path in 2014 (in particular the ongoing crisis in the Ukraine, a vote for Scotland to become an independent state and an increasingly strident Russia).

Currently, the United States’ economy has been working out of the 2007-2009 recession, and shows promise for businesses and unemployed workers. Overly indebted homeowners, who have previously shied away from any immoderation, are more willing to spend money, trusting in their stabilizing balance sheets. The United States Bureau of Labor Statistics shows unemployment is going down, to a low of 6.6%; and hourly wages are going up to an average of $24.21 an hour as of January, 2014. Current individual debt levels have gone from an average of 135% of disposable income to only 109%, and banks are showing a growing willingness to expand their balance sheets by offering loans. The current global economic growth rate is 3.6%, much higher than the predicted 2.9%.

On the employment front job cutting has come to an end in the local and state government, and there is new bipartisanship at the Federal level as demonstrated by the debt ceiling extension without fanfare.  

Where are the potential hazards as the year progresses?

Let’s start with the Fed - Janet Yellen intends to continue “quantative easing” but at a reduced pace. The markets wobbled a little bit in January but seem to have factored this in. Yellen has indicated rates will not likely be raised until the employment picture improves further. Although unemployment is improving, millions have simply given up on finding work and as such are not counted as unemployed, but rather as retired. Work force participation has gone down from 66% in 2007 to 63.2% in 2014. Though hourly earnings are going up, they have only increased at a rate of 0.3% yearly. This will pose a challenge to productivity gains moving forward.

Low interest rates and high profit margins have boosted capital reserves and economic activity is likely to pick up through the year. Businesses and homeowners are tentatively moving towards spending more after recovering from the recession and cold winter. The banking system is posting better financial results and loan volume is starting to inch up.

In summary the outlook for the year looks positive. Households are likely to see improved earnings and employment opportunities. Also for the first time in several years credit card balances have gone up. This indicates an uptick in consumer spending which will help to fuel growth across a wide cross section of the economy. With access to cheap capital and with excess cash reserves there should be increased capital investment as corporations retool and expand. This will serve to continue the boom in construction and help support a broad-based expansion.