What can we expect from the US economy in 2014?

Summary: 2013 ended with economists predicting accelerating economic growth in 2014, as they have every years since 2010 (wrongly). Let’s examine the stories, so you can prepare your family and business for the range of likely outcomes.

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Contents

1. Hope for 3.5% growth, or more!
2. Bigger hope: what if we get 4%?
3. White hot hope:  we will get 4%, then again!
4. An alternative, darker view
5. The bad news
6. For More Information

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The consensus forecast per Blue Chip Economic Indicators as of February 20 for US GDP: 2.7%  in 2014 and 3% in 2015. But years of over-optimistic forecasts have made economists cautious, so their “whisper numbers” are higher than their official numbers. My guess is that 2014 will be another year of slow (2.2%?) growth. But, as always, surprises await us — good and bad. Now for the stories…

(1)  Hope for 3.5% growth, or more!

“Nothing Burns Like the Cold“, Scott Minerd (Global Chief Investment Officer), Guggenheim Partners, 20 February 2014 — Excerpt:

… there has been a litany of weather-related bad news — U.S. industrial production has decreased, mortgage applications have fallen, housing data disappointed, and even restaurants are struggling. The full extent of the weakness may have surprised many, but investors often underestimate the ripple effects of a supply chain interruption. This environment is evocative of Japan’s 2011 earthquake and tsunami, which threw the global supply chain into such disarray that it caused an 11% decline in U.S. auto sales in the middle of that year.

… The good news is that this is likely only transient noise, and that rising temperatures in March and April should revive everything from auto sales to factory activity, helping the U.S. economy return to its improving trend. Pent-up consumer demand should re-accelerate growth in the spring after this short, sharp pain, setting the United States on course for solid growth in 2014 of 3.5% or more.

(2) Bigger hope: what if we get 4%?

“When the economy recovers from the cold”, Hans Mikkelsen (credit strategist), BofA-Merrill, 18 February 2014:  — Excerpt:

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Unfortunately the data cold spell is diverting attention away from what we consider the most relevant risk scenario this year … that growth surprises to the upside …

Validating the consensus

Consensus among investors we speak with expect the economy to pick up this year, but the pace of growth to remain rather unimpressive on a historical scale. Clearly the weak economic data appears to validate that view at the margin. …

What if the economy grows at 4% and this is 1994?

If the economy is growing at 4% or more – which is not what we are looking for but we also can’t rule it out – then we would be concerned that the market will pull forward its pricing of the first rate hike to the second half of 2014 instead of 2015. In terms of the probability of such upside scenario, note that with the revisions non-farm payrolls for November, before the weather began to impact the data, is now an impressive +274K.

(3) White hot hope: we will get 4% in 2014 and again in 2015!

“The Case for 4% Growth“, Gene Epstein, Barron’s, 15 February 2014 — “Demand for new homes — and the outlook for economic growth — are understated, say these economists.”

Snow paralyzed the Eastern U.S. last week, but it won’t put a chill on what could be the hottest economy since the late 1990s. That’s the contrarian outlook of Applied Global Macro Research, an unusually rigorous and prescient group that expects 4% growth in economic output this year and next. The firm’s three economists … cite the ongoing housing recovery for their bullish outlook, arguing that future demand for housing is understated.

… The key difference, from their standpoint, lies in their long-term analysis of the dynamics of the housing cycle, plus the important positive effects of a rising housing sector on consumer spending. Just as the bursting bubble in housing helped trigger the Great Recession, the prolonged sickness in this sector, which has persisted well past the recession’s end, is now poised to give way to an acceleration in the recovery that has been under way for the past few years.

Pent-up demand for housing should therefore boost this sector’s contribution to economic growth. The contribution will come directly, via the increase in residential investment, and indirectly, through channels that include the greater purchase of consumer items for the home and a general increase in consumer spending from rising housing wealth.

“We can’t overstate the importance of housing,” comments Applied Global President Jason Benderly. “The housing cycle is likely to boost economic growth for some time to come.”

To these powerful ingredients, add a few others: the feedback effect on consumer spending from rising labor income; the diminished “fiscal drag” from higher taxes and spending cuts; and the likelihood that investment in equipment, another key component of gross domestic product, will heat up in response to strength in these other sectors.

(4)  An alternative view, a darker view

The optimistic economists see US growth in 2014 driven by exports, construction (especially housing), capex, consumer durables, and jobs. The consensus of economists is usually right (but they don’t and can’t predict shocks), but I believe ALL of these are problematic. I expect another year of roughly 2% growth in GDP; and believe 4% is less likely than a recession.

Why no good growth? Several reasons. But first, what is good growth? The Fed’s estimate of long-term average US growth is 2.2% – 2.4% (and falling; in April 2011 it was 2.5% – 2.8%).

(a)  Exports: Japan & EU are growing only slowly. Roughly 20%  of US exports go to EM’s, some of whom are having problems. China might slow — a lot — if its government decides to take bold action on their credit problems.

(b)  Capital expenditures: This is usually a laggard, as corporations respond to rising sales with more investment. There was a small pickup of capex in 2013. But I doubt much happens until the economy accelerates. The exception is energy (aprox 30% of US capex), which depends on continued expansion of fracking).

(c)  Construction:

1. Private business construction has remained stagnant, but a recovery has long been expected. See (b) above. Some types, especially office and retail space, might be in long-term declines due to technology.
2. Public construction is stagnant. No sign that this will change soon.
3. Residential is the great hope. It’s risen on institutional buying and government lending to subprime buyers. There are indications that the Fed has blown another bubble, which the combination of rising interest rates and higher prices has burst. Recent data suggests that housing might have begun to stall. For more about this see Has the Fed blown another housing bubble?; also “Housing Bubble II: What’s Ruining Home Sales?” by Wolf Ricter.

(d)  Consumer durables, especially vehicle sales (a big winner in 2013). Auto sales have risen on inventory build plus subprime credit (both falling credit scores, long duration, absurdly high loan-value). The optimists’ story for 2014 is more growth driven by job and wage growth. The dark alternative is that peoples’ income continues to grow only slowly, and the subprime loan growth slows (or ends).

(e)  When the economy accelerates, job growth will follow. When job growth strengthens, employers will have to increase wages. It’s not a driver.

Also: there are many wild cards in the deck. Bursting of the China credit bubble. Failure or success of Abenomics. Relapse or recovery in Europe. Failure of the great monetary experiments running throughout the developed world.

(5)  The bad news

The optimists expect the good times to return, the long expansion from 1975 to 2007. That’s not likely. That great expansion resulted from the boomers entry into and maturing in the labor force plus a massive expansion of debt — public, corporate, and household. Now both of those factors have flipped into reverse, and probably will remain there for a decade or more.

Most of the boomers will retire with less pension income and less net savings (more debt, less assets) than their parents. They’ll work to an older age, but suffer a severe income drop upon retirement.

Plus the boomers love affair with real estate has already begun the long downsizing, from 3 decades of buying to selling. From large house to small house or condo, to assisted living complex, to nursing home or hospice, to the ultimate downsizing in the grave. The high college debt and slow income growth of their children and grandchildren will not allow them to take up the slack (in January’s existing home sales, only 26% were first time homebuyers: lowest since records started in October 2008, below the pre-crash average of 40%).

It’s a new era, with very different dynamics than the post-WW2 era now gone. Many economists do not see this.

Ahead of us lies a new world, shaped by the rise of the emerging nations and the 3rd industrial revolution — both trends already in motion. We can have a wonderful future. Getting there will take work and wisdom.

(6)  For More Information

The artwork Patronus is by Penny-Dragon at deviantART. See her work there.

(a)  Other posts looking at the economy today:

1. A look at the state of the US economy. Join me in confusion!, 13 July 2013
2. Let’s reflect on the course of the course of the US economy. Not a pretty picture., 8 September 2013
3. Do you look at our economy and see a world of wonders? If not, look here for a clearer picture…, 21 September 2013
4. The great monetary experiment enters a new phase, with America as the stakes, 27 October 2013
5. The key to understanding the future of QE3, and the future of our economy, 12 November 2013
6. Larry Summers gives us the bad news. Worse, the only solution is more of the same., 20 November 2013
7. The astonishing news about the December jobs report: it shows continued slow growth, 13 January 2014

(b)  Other posts about the US economy

1. A certain casualty of the recession: the US Government’s solvency, 25 November 2008
2. Beginning of the end of the Republic’s solvency. Soon come the first steps to a reformed regime – or a new regime., 14 August 2009
3. The Robot Revolution arrives, and the world changes, 20 April 2012 — about structural unemployment
4. America is rich and powerful because we can borrow. Will this debt build a stronger America?, 5 June 2012
5. America’s strength is an illusion created by foolish borrowing, 10 October 2012

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