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Friday, November 01, 2013

Comment: Looking for Stronger Economic Growth in 2014

by Calculated Risk on 11/01/2013 12:40:00 PM

Back in January I wrote: The Future's so Bright .... I started by writing that "It looks like economic growth will pickup over the next few years", although for 2013, I was expecting "another year of sluggish growth" due to fiscal policy.

My guess was "we can expect another year of sluggish growth in 2013 probably in the 2% range again".  Fiscal austerity probably subtracted 1.5% to 2.0% from GDP growth in 2013, and the foolish government shutdown probably subtracted a little more.

But even with contractionary fiscal policy, it looks like the US economy will grow in the 2% range this year. Ex-austerity (and ex-shutdown), we'd probably be looking at a decent year - maybe this would have been the best year since Clinton was President!

Right now it looks like 2014 will be a better than 2013 for a number of reasons:

1) The housing recovery should continue.

2) Household balance sheets are in much better shape.  See: NY Fed: Household Debt declined in Q2 as Deleveraging Continues and Fed: Household Debt Service Ratio near lowest level in 30+ years

3) State and local government austerity is over (in the aggregate).

4) There will be less Federal austerity in 2014 (hopefully the sequester cuts will be minimized). And a government shutdown is unlikely. From Ethan Harris at Merrill Lynch:

There was also a major silver lining with the shutdown: it gave the general public and moderate politicians a chance to clearly state their views on using a shutdown as a negotiating tactic. Public opinion polls strongly rejected the shutdown as a way to force changes in the Affordable Care Act (ACA) and the favorability rating of the Republican Party fell sharply.
All of this makes a shutdown next year unlikely. Our hope and expectation is that business and household confidence will slowly rebound as Washington falls off the radar screen. Of course, some headwinds remain, including uncertainty about the rollout of the Affordable Care Act, but with no new austerity and no major brinkmanship moments, the economy should improve.
5) And demographics are favorable going forward.

We will still some disappointing numbers related to the shutdown (I expect the unemployment rate to spike higher for October, but to be reversed in the November report). But right now, 2014 is looking solid.