Coming off a challenging year, signs point to economic improvement in 2014.
Aside from the spectacular performance of the U.S. stock market, 2013 was business-wise and economically a year that many people would like to forget. Higher taxes went into effect. Federal government spending was sequestered and the government was subjected to a partial shutdown. A “default” was threatened.
Affordable Care Act enrollment proved to be a fiasco. Before it actually commenced, there was seemingly endless talk about “tapering” (reduced Federal Reserve purchases of securities). Elsewhere, a tiny member of the euro area, Cyprus, saw a collapse of its banking sector, causing huge losses of its largest depositors.
Surprisingly, and in spite of this drama, the year ended on a high note. Due to a big surge in inventory accumulations, real gross domestic product growth of 4.1 percent (annualized) in the third quarter saw its fastest pace of expansion since late 2011.
A flood of exports provided the underpinnings of good growth in Q4. Industrial production and factory ordering both showed quickening growth as the year ended.
In spite of the divisive and vituperative political climate, the economy appears to be getting its act together. So far this year, the economy has seen its own “global climate change,” evidencing itself in several ways.
First, the economy in 2014 will not need to absorb as much new fiscal drag—tax increases and government spending restraints—as it did in 2013. Last year saw a payroll tax rise, an increase in marginal tax rates for high-income earners, new Affordable Care Act taxes and federal government spending restrictions. With less drag, growth should be higher in 2014.
Second, late-2012 and early-2013 saw an enormous degree of uncertainty over future tax rates, federal spending and international stability. As of now, many of these risks have been cleared up—some in positive ways. For instance, the U.S. personal tax code is fixed, with the Bush tax cuts of 2001 and 2003 made permanent for the “98 percent” and a permanent fix to the alternative minimum tax. The world economy seems to be more stable, with better prospects, too.
Third, there are cyclical indications of improved prospects for the coming year. Rising trends in the leading-edge housing and autos sectors suggest more economic growth will be forthcoming. After an extended period of business inventory adjustments, relative to business sales growth, a better balance has been achieved, and some business-boosting rebuilding may be in order.
Policy Impetuses
Some of the big policy questions remain unanswered. Can still-large U.S. federal deficits be whittled down and can the national debt be made manageable? Can the Federal Reserve extricate us from its trillion dollars per year quantitative easing program without all players suffering debilitating withdrawal symptoms? Can other countries achieve stability as they likewise wean themselves from overspending and profligate liquidity creation? Geopolitically, can we avoid a big blow-up in the Middle East?
Consumers and businesses are tired of bearing the mental burdens of such weighty issues. Perhaps the most important thing now, as politicians grapple with a budget and another debt ceiling, is that we avoid the kind of shutdown and heated rhetoric that was seen last October. Fortunately, there does not seem to be much stomach for a replay of those events.
The Prospects
Avoiding that, the decks will be cleared for at least a mini-breakout to improve economic performance.
By Dr. Ken Mayland
Dr. Ken Mayland is president of ClearView Economics LLC. He is a member of the Blue Chip Economic Forecasting Panel and can be reached at drken@cvecon.com. These views are those solely of Dr. Mayland and may change along with market conditions.
