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Our Outlook for the Economy

GDP, employment, and consumption growth have all been stuck in a very narrow range--and are likely to remain so in 2014.

Robert Johnson, CFA, 12/27/2013

  • GDP growth in 2014 should continue at a 2.0%-2.5% rate, inflation at 1.5%-1.8%, and job growth at 190,000 per month.
  • The recovery continues at a snail's pace, with income and consumption growing at half their normal recovery rate due to slower population growth and an aging demographic.
  • The good news is real hourly wage data points to a stronger labor market.

 

Below is my economic forecast, which includes my estimates for 2013 and 2014, as well as data from 2011 and 2012 for comparison. The table is based on last-period to last-period growth rates, or the last period of data for single data points.

What is most striking to me about the table is that overall GDP growth rates, employment growth, and consumption have all been stuck in a very narrow range, centering on 2%, for the last three years. I expect much the same result in 2014. The U.S. economy appears very much like an ocean liner, finding it very difficult to change either speed or direction. My forecast is little changed from my last quarterly report, though this table now includes more data points.

I expect little change in the overall GDP growth rate in 2014, but the composition of that growth is likely to be somewhat different. Inventories should be a much smaller contributor to growth, net exports are likely to be a larger subtraction from GDP as imports grow, and government spending should be a much smaller negative next year. Consumption, housing, and business investments (excluding inventories) are likely to change little from their 2013 growth rates. I don't see a big boom or a bust.

Others are more bullish on overall GDP growth, but I suspect growth rates in autos will decelerate, existing home sales will likely be flat, and government spending will still be a drag, albeit smaller than the rather large subtraction in 2013. With little change in the 2% GDP growth rate, I suspect employment growth also won't change much in 2014.

Slow growth, a wide output gap (a fancy capacity utilization measure), and a bumper farm crop should all keep inflation in check in 2014, although medical costs may rise faster than in 2013, bringing up the overall rate of inflation. With the Fed officially tapering bond purchases, 10-year Treasury bond rates should move up to reflect the inflation rate plus a spread, now that the Fed is withdrawing its support.

Auto sales should continue to do well in 2014, with continued employment growth, new models, and an aging fleet. Unfortunately, auto sales are now approaching previous highs, and the law of large numbers is beginning to set in, with year-over-year growth rates likely to slow.

Robert Johnson, CFA, is director of economic analysis with Morningstar.

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