Bank of the West Chief Economist Scott Anderson, PhD says that for the first time in six years, consumer spending will lead U.S. economic growth as we enter 2014. Strong exports, capital spending and a recovery in government spending will play a large role in 2014 economic growth.
“We are, at last, leaving the desolation of the Great Recession,” said Anderson, who is currently ranked the fourth best economic forecaster of U.S. GDP by Bloomberg News over the past two years. “Prospects for the U.S. economy are particularly bright for 2014, as all major sectors of the economy will contribute to U.S. growth. Job creation is finally accelerating as confidence among businesses large and small has returned, wealth gains are robust, exports are rising and drag from sequestration and Washington in-fighting is set to diminish.”
Anderson sees unemployment have a steady decline through 2014 to 6.6% and potentially create the first challenge for incoming Fed Chairwoman Janet Yellen: how to manage interest rates during a rapidly falling unemployment rate and stronger job growth.
“The Fed’s unemployment threshold of 6.5% for raising rates will be tested in 2014,” Anderson said. “Although strong economic growth might seem like a nice problem to have, Janet Yellen will have to manage the market’s interest rate expectations carefully by either strengthening forward guidance, for example lowering the Fed’s unemployment threshold to 6.0% early in 2014, or telegraphing a tightening cycle sooner than anticipated on stronger employment and economic growth.”
Anderson reveals his key sector growth observations:
The Consumer as Bellwether – With consumer deleveraging in the past and debt-service burdens at record lows, there will be fewer constraints on borrowing and spending. An estimated 2.6 million new jobs will be added and unemployment continues to decline and banks will become more willing to lend to consumers and consumer credit will expand.
Better income gains will be a result of several factors including: no payroll tax hike in 2014, steady low inflation and nominal wage gains in a tightening labor market – and, in some cases, wages being bid up for highly skilled workers in low supply.
“As real income gains continue to recover, real income growth at these rates should easily support real consumer spending of 2.6 percent in 2014 – a 30 percent improvement over 2013,” said Anderson.
Capital Spending Improvement – Taking cues from the consumers, business confidence and small business spending will recover.
U.S. Manufacturing and Export Revival – U.S. exports are expected to see the best growth since 2011, and United States manufacturers are performing better than the overall economy. Industrial production growth has been much stronger during this economic expansion than in the early 2000’s. The U.S. also benefits from lower energy prices and higher productivity, allowing manufacturers to compete better in the global marketplace.
Return in Government Spending – Austerity measures taken by the government in recent years are expected to diminish. State and local governments are beginning to spend more as tax revenues improve. Another federal government shutdown nor a crisis over the federal debt ceiling is projected, and there could be a surprising benefit as federal spending constraints are eased.
Housing Market Recovery Remains Intact – The housing market will continue to recover, although affordable housing and rising mortgage rates will remain a headwind in 2014 as the Federal Reserve Board ends quantitative easing. After a 17.5% gain in 2013, housing starts will rise 12.3% in 2014. Appreciation of home prices will slow sharply on higher interest rates. Housing affordability will be a bigger constraint, especially in high-priced markets like the coastal regions of California, while marginal buyers will be forced into lower-priced homes.
Despite all of the optimism, Anderson also shared factors that could slow the U.S. recovery in 2014:
- An Ineffective Government – Political discord in Washington over government spending or the debt ceiling could weigh on consumer and business confidence, eventually leading to panic by Treasury bond investors which could trigger a rise in interest rates, a weaker dollar and a substantial sell-off of stocks.
- Federal Reserve Growth Strategy – Actions by the Federal Reserve to end the third cycle of quantitative easing could create an unexpectedly large uptick in long-term interest rates that would negatively impact the housing market, business spending and purchases of durable goods like autos.
- Emerging Market Instability – Capital outflows and financial instability could hit the economies of emerging markets, which in turn would exacerbate Europe’s debt and banking problems. A contraction in Europe could reignite a banking crisis.
- Geopolitical Discord – Middle Eastern and East Asian geopolitical differences could escalate into armed conflict, which could also derail economic expansion in the U.S.