So, it’s 2014 now. What should we expect in this cycle around the sun?
- Faster economic growth, but not much faster. Since 2009, American annual economic output growth has limped along at around 2% annually. With household balance sheets restored, consumer spending should pick up modestly, boosting GDP growth. A continuing resurgence in the housing and stock markets should also help lift consumer spending via the “wealth effect”. Additionally, a long-awaited European recovery from its double-dip recession and higher growth in developed countries should boost US exports, also lifting GDP growth. Government policy should also be more friendly to growth; local and state governments are finally beginning to benefit from higher tax revenues, and most fiscal adjustment programs have been completed. At the same time, expect uncertainty and premium spikes due to the rollout of ObamaCare to act as a modest restraint on growth and hiring.
- Continued (perhaps accelerated) increases in interest rates w/low inflation. Since May 2013, treasury yields have largely bottomed out and have begun a modest recovery, putting upward pressure on interest rates economy-wide. Expect this to continued as growth continues and the Fed prepares to further “taper” its quantitative easing (QE) program. Considering how much “slack” remains in the economy (gap between actual output and potential output), however, expect inflation to remain low.
- Spring or August stock market correction? The stock market posted some of its best gains since the boom of the late 90’s last year, despite an economy that is still widely considered to be weak. This is unsustainable. Though corporate profits are at record highs, I believe investors are overestimating the earnings potential of companies – expect a minor stock market correction in mid-2014.
- Small increases in the trade deficit. Rising interest rates generally put upward pressure on the value of the dollar/are a reflection of a higher dollar value. A stronger dollar increases the purchasing power of consumers and makes goods produced in other countries relatively more affordable. Combine this with my expectation of stronger consumer spending in general to get my expectation of import growth exceeding export growth, widening the balance-of-payments deficit marginally.
- Continued pickup in job creation. Faster economic growth and reduced ability of employers to boost productivity much more in the short-term should encourage faster hiring, though the jobs created will likely remain exclusively low-skilled low-pay or high-skilled high-pay, reflecting a continuation of decades-long trends in the American labor market.
Like the forecasters, for 2014 I am optimistic; as for the rest of the middle of the decade, not so much. We’re overdue for another recession. I’m thinking 2016?
That’s all I’ll write for now.