by Calculated Risk on 1/03/2014 01:58:00 PM
Friday, January 03, 2014
From Richmond Fed President Jeffery Lacker: Economic Outlook, January 2014
Many forecasters are citing the recent surge as support for projections of sustained growth at around 3 percent starting later this year. It's worth pointing out, however, that this has been true at virtually every point in this expansion. Ever since the recovery began, most forecasters have the economy picking up speed in the next couple of quarters with the easing of headwinds that have been temporarily restraining growth. My own forecasts (at least initially) followed this script as well.CR Note: I was forecasting 2% in 2013, as were several key forecasters. So not everyone was overly optimistic last year.
Although consumption grew rapidly at the end of last year, we have seen similar surges since the last recession, only to see spending return to a more moderate trend. Consumer spending trends are likely to depend on whether the dramatic events of the last few years are only a temporary disturbance to household sentiment or if they instead represent a more persistent shift in attitudes about borrowing and saving. At this point, I am inclined toward the latter view.Lacker is referring to the NFIB index. What he fails to mention is that during good times, small business owners complain about "government regulations and red tape". This is usually a good sign. It could be a bad sign this time, but I expect small business growth to improve in 2014.
Businesses also appear to be quite reticent to hire and invest. A widely followed index of small business optimism fell sharply during the recession and has only partially recovered since then. Interestingly, when small business owners were asked about the single most important problem they face, the most frequent answer in the latest survey was "government regulations and red tape." This observation accords with reports we've been hearing from many business contacts for several years now. They've seen a substantial increase in the pace of regulatory change and a substantial increase in uncertainty about the shape of new regulations. Both are said to discourage new hiring and investment commitments.
I've discussed consumer spending and business investment, which together account for about four-fifths of the economy. Residential investment is one area in which we have seen strong growth. Real residential investment increased by more than 15 percent in 2012, and through the third quarter of last year it increased at a 12 percent annual rate. Many housing market indicators, such as housing starts and new home sales, remain well below levels that were typical during the expansions of the Great Moderation, so there is a reasonable basis to expect residential investment to continue to grow. But since this category is only 3 percent of GDP, it has only a marginal effect on the overall outlook.CR: This is something I've been writing about since I started the blog in 2005, but it is worth repeating ... even though Residential Investment usually only accounts for around 4% to 5% GDP (3% right now), it isn't the size of the sector, but the contribution during a recovery that matters - and housing is usually a large contributor to economic and employment growth in a recovery. And there also many ripple effects from housing. (see: Professor Leamer's presentation from the 2007 Jackson Hole Symposium: Housing and the Business Cycle )
Adding up all these categories of spending yields a forecast for GDP growth of just a little above 2 percent — not much different from what we've seen for the last three years.Could be ... but I'm more optimistic.
Posted by Calculated Risk on 1/03/2014 01:58:00 PM