Note: Near the beginning of each year, I find it useful to jot down a few thoughts on how I expect the economy to perform. This isn't to test my forecasting skills - sometimes I learn more when I miss a forecast (As an example, I've spent a significant amount of time looking at the participation rate and demographics since I've been overly pessimistic on the unemployment rate the last few years).
Earlier I posted some questions for this year: Ten Economic Questions for 2014.
Here is a review of the Ten Economic Questions for 2013.
1) Economic growth: Heading into 2014, it seems most analysts expect faster economic growth. So do I. Will 2014 be the best year of the recovery so far? Could 2014 be the best year since the '90s? Or will 2014 disappoint?
First, here is a table of the annual change in real GDP since 1999. Since 2000, the fastest real GDP growth was 3.8% in 2004, and the fastest growth for the recovery was 2.8% in 2012.
It is likely that 2014 will be the best year of the recovery, and possibly (with some luck) the best year since Clinton was president.
There are several positives for the economy at the beginning of 2014: the housing recovery is ongoing (usually the best leading indicator for the economy), state and local government austerity is over (in the aggregate), household balance sheets are in much better shape - and it appears that in the aggregate, household deleveraging is over, most of the obvious downside risks have diminished, and even commercial real estate (CRE) investment and public construction will both probably make small positive contributions in 2014.
There is still some austerity at the Federal level (and cutting off emergency unemployment benefits is bad economic policy). Also, there are always downside risks from Europe and China, rising interest rates and more, but with all these positive trends I'd expect a pickup in US growth in 2014.
In 2012 (the best year of recovery for GDP growth so far), Personal consumption expenditures (PCE) only increased at a 2.5% real rate, compared to 3.8% in 2004 (best year since 2000). I expect PCE to pick up again into the 3% to 4% range, and this will give a boost to GDP. This increase in consumer spending should provide an incentive for business investment. Add in the ongoing housing recovery, some increase in state and local government spending, and 2014 should be the best year of the recovery with GDP growth at or above 3% (4% is not impossible).
Here are the ten questions for 2014 and a few predictions:
• Question #1 for 2014: How much will the economy grow in 2014?
• Question #2 for 2014: How many payroll jobs will be added in 2014?
• Question #3 for 2014: What will the unemployment rate be in December 2014?
• Question #4 for 2014: Will too much inflation be a concern in 2014?
• Question #5 for 2014: Monetary Policy: Will the Fed end QE3 in 2014?
• Question #6 for 2014: How much will Residential Investment increase?
• Question #7 for 2014: What will happen with house prices in 2014?
• Question #8 for 2014: Housing Credit: Will we see easier mortgage lending in 2014?
• Question #9 for 2014: How much will housing inventory increase in 2014?
• Question #10 for 2014: Downside Risks
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