Transcript Economic Forecast for 2014 & Beyond

US Economy
Forecast 2013, 2014
Till Schreiber
College of William & Mary
September 26th 2013
Nafa Annual Convention, Savannah, GA
Forecast for 2013, 2014
• What would we like to happen?
– Deficit and debt ceiling deal
– Entitlement and health care reform agreements
– Fewer but smarter regulations and tax reform
– Less uncertainty
– ….
• What’s actually going to happen?
– Not all of that.
Realistic forecast must make
assumptions about some of these factors
• No ideological agenda
• Based on current and historical data, facts
(and some theory)
• Where is the economy now?
• What do some leading indicators suggest
about the near future?
Snapshot of the economy
• Unemployment rate 7.4%
– Mediocre job creation, people dropped out of labor force
– Government sector shedding jobs
• GDP growth disappointing
– 1.1% in first quarter (at annual rate), just 1.7% for the
second quarter
• Economy slowed down by multiple “headwinds”
– Political uncertainty
– Sequester
– Slowdown/crisis in Europe and China
• Inflation expected to be about 2-3% each year going
forward over the next decade (based on bond yields)
Will the jobs/workers come back?
Government spending cuts
• Absolutely necessary over the long term
– Unless you are ok with living in a country like France;
most Americans don’t seem to be
• Big cuts right NOW will slow the economy down
for the rest of the year and next year
– Higher unemployment than otherwise
– Reduction in growth
– All bets are off, if debt ceiling is not increased. This
would lead to a massive reduction of spending right
NOW. How nasty will the political fight be?
• Assume: No reversal of spending cuts this year,
no “stimulus” from government sector
Investment, Investment, Investment
• Main issue of disappointing “recovery”
– Private sector investment fell of a cliff in late 2008,
early 2009
– Has recovered only very slowly since 2009 and is
still quite a bit away from levels before 2007
Investment as share of GDP (blue) vs.
Unemployment rate (red)
Housing Market
• Residential fixed investment (People building
houses, or major remodel/improvements)
– According to latest numbers still way below 2005 level.
For every $100 spend on housing construction in
2005, now only $56 are spent. But up a bit from two
years ago.
• Assume: Housing market continues to slowly
recover.
Business Sector
• You guys!
• High levels of uncertainty
– Regulations and Taxes
– Consumer and Industry demand going forward
• Consumer Confidence Measures still low
compared to 2003-07
– Slow recovery of confidence
• Purchasing Managers’ Index (ISM)
– Big jump up in July. New Orders in manufacturing for
capital goods are also up. Temporary blip or beginning
of faster recovery???
Exports
• Questions about growth prospects in
emerging markets
– Dollar has recently appreciated versus many
emerging market currencies
• Eurozone faces internal issues, so does Japan
• No export boom likely overall
What to make of all this?
• Growth in the last part of 2013 will likely be at
most around 3%, maybe lower.
– Not enough to make major progress in terms of
reducing unemployment; no surprise if rate
remains above 7% over the rest of the year
– Combined with growth of about 1.5% in the first
half, overall growth for the year of 2013 will be
way below 3%
Forecast for 2014
• Growth should pick up once the recovery really
takes hold
– Has been predicted since late 2009, many businesses
and households have now paid down debt substantially
• Crucial market: Investment! Both residential
(housing) and other fixed investment
• No government policies in sight to address
regulation mess boldly
– Muddling through
• If economy grows fast, interest rate hikes may slow
down recovery of housing market somewhat
Forecast for 2014
• Households and many businesses are still
paying down debt from the bubble years
– Will continue in 2014
– Debt levels have come down but not nearly to
pre-bubble levels
• “Disappointing” recovery may continue
• Growth of 3% unlikely to be topped next year
• Unemployment comes down very, very slowly
Forecast for 2014
• Assumes no major new “headwinds”
• Also no miracles
• Assumes no major policy changes
– Safe assumption for Congress
– Also unlikely that the Federal Reserve will be willing to
do something dramatic, if anything expect a return to
“more normal” policies and a bit higher long term
interest rates
• Forecast consistent with forecast from Federal
Reserve, economists at Goldman Sachs, PIMCO etc.
– Sorry, I am not more cheerful but I have good company…