What to Expect in 2014December 18, 2013 By Shawn G. DuBravac, chief economist and senior director of research, CEA
I use the term “momentum” cautiously. We won’t return to economic growth in 2014. The ripple effects of the “little depression” of 2007-2008 continue to slow economic growth in 2014. But growth does pick-up slowly. In 2013 we saw the economy grow at 1.7 percent. This is about three-tenths of a percentage point lower than the consensus economic forecast at the start of the year. Today, we believe economic growth in the U.S. will increase to 2.5 percent in 2014 – a measurable uptick from 2013.
Economic Bright Spots and Risks
There are a number of bright spots as we look into 2014. Diminished fiscal drag and improving private sector demand help lift growth for the year. Vehicle sales continue to outpace expectations and the housing market continues to improve in terms of housing starts and pricing. The labor market will improve slightly as increased hiring will place some downward pressure on the unemployment rate.
Companies have been reluctant to make significant capital investments as they wait for material demand to emerge before making investments. That will change in 2014. During the economic recovery, companies have focused on efficiency gains, but I believe those have largely run their course. As demand begins to pick-up, companies will need to make capital investments to capture this uptick in demand. Non-residential investment grew 2.4 percent in 2013 and is expected to grow 4.7 percent in 2014.
The unemployment rate continues its slow decline in 2014 – falling from 7.1 percent to about 6.7 percent by the end of 2014. Energy prices will pick up a bit in 2014, which will cause a modest increase in inflation, although it is coming off a low base. Inflation moves higher but remains below two percent for 2014 and 2015.
There will surely be plenty of risks in 2014. Internationally, contagion from Europe’s continued problems or a failed firming in China could hurt U.S. growth in 2014. Rising long-term interest rates could slow the U.S. and emerging markets more than expected. Home prices and housing construction in the U.S. could relapse. Geopolitical uncertainties in Iran, North Korea or Syria could unnerve markets.