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Commentary: Temper The Economic Optimism For 2014

dleafy | sxc.hu

The end of the year is always a time to take stock of what has transpired during the past year and what is likely to happen in the one about to begin.  Let’s do so by considering several key economic measures.

Economic expansion limped along for another year.  Gross Domestic Product (GDP), adjusted for inflation, is the best measure of the economy’s total output. It increased this year, but not nearly as fast as many would hope, especially three years out form the end of the Great Recession.

Even though GDP expanded at a 3.6 percent rate in the July-September quarter, much of it was in inventories. It is production, but it is production that will sap strength from the last quarter of the year.

With the fourth quarter’s figure likely to be less than 2 percent, the final tally for 2013 will show the economy expanding at slightly above 2 percent, well below its historical average of about 3 percent.

Why the continued lackluster performance? Much research has shown that recoveries from the kind of economic and financial crises that we experienced beginning in 2008 are unusually slow. Add to that the policy disarray emanating from Washington and our continued turgid pace makes more sense.

The federal government’s sequestration took a toll on GDP growth. So did the sheer uncertainty over policy — spending and taxation alike — that characterized much of the year. Some estimates suggest that fiscal policy reduced GDP growth from 1 to 1.5 percentage points in 2013.

Will 2014 show more robust growth? Uncertainty remains over fiscal policy. Not knowing what your taxes will be in the future dampens the desire to expand a business and hire more employees. While the recent budget deal reduces some of the negative sequestration effects, the roll-out of Obamacare will add another dimension of uncertainty to the mix. As I have written, the Affordable Care Act will impose a significant tax on many households in coming years. In an era of tepid growth, raising taxes is not pro-expansion.

How monetary policymakers will behave adds another source of uncertainty to the already-cloudy picture of 2014. There has been much talk of the “taper” — reducing the Federal Reserve’s current $85 billion monthly purchase of financial assets — but it is unclear when it will commence, by how much it will decline, and for how long.

It also is unclear what the economic impact will be once the Fed discontinues its program of keep interest rates artificially low. All that and a new chair at the helm of the Fed have given pause to bankers and business owners alike as they contemplate business plans. Oh, add to that list the continued rollout of the Dodd-Frank regulatory morass.

With all that, don’t expect much improvement in economic activity in 2014. Based on my compilation of forecasts, GDP growth will probably fall within the 2.5 to 3 percent range. While there is little probability of slipping back into recession mode – the Philadelphia Fed’s assemblage of predictions by 42 professional forecasters (the so-called Blue Chip Forecasts) put the probability of negative GDP growth at about 11 percent — the economy just will not perform up to its historical norm

The lack of a substantial increase in economic activity portends at best a moderate reduction in the unemployment rate. Currently at 7 percent, do not expect much improvement over the coming year. The best prediction puts the unemployment rate at about 6 percent by the end of 2014.

Even if unemployment falls to 6 percent, the number of long-term unemployed among us will not shrink substantially. This will put additional pressure on families coping with the recent economic quagmire. It also will increase pressures on ever-expanding social programs, both in 2014 and further out into the future.

Isn’t there any good news? Inflation will remain subdued over the coming year. There is enough slack in the economy that demand simply cannot rise enough to put upward pressure on prices. Look for inflation, measured by the Consumer Price Index, to rise at no more than 2 to 2.5 percent.

Let’s hope that 2014 is the year when politicians remove the barriers to economic growth. Increased regulations that business and individuals must decipher and abide by will not engender a robust expansion. Uncertainty over taxation, spending, and health care must be reduced. And it is time to let markets set an important price: the interest rate.

Failure to act on each of these fronts is a recipe for further economic stagnation.

R.W. Hafer is a research pProfessor of economics and finance at Southern Illinois University Edwardsville and a research fellow with the Show-Me Institute.

Rik Hafer is a distinguished research professor in the Department of Economics and Finance at Southern Illinois University Edwardsville and a scholar at the Show-Me Institute.