Economic Forecast Update For 2013-14: Light-To-Moderate Growth

by: Dr. Bill Conerly

The economy has several positives and several negatives as we move forward in 2013 and look to 2014. The plus side begins with the economy's normal tendency to expand. We have a growing labor force and continuing capital formation and technological improvement. More importantly, we have entrepreneurs trying to create greater value in their goods and services, at less cost. That by itself would keep the economy moving forward in the absence of strong negatives.

Positives Negatives
Tendency toward growth Fiscal policy
QE3 Health care policy
Available labor, equipment Weak expectations
Low interest rates

The Federal Reserve's easing, QE3, will have a positive impact, mostly toward the end of this year. Remember that the time lags in monetary policy are long and variable. (See my article titled "QE3 And The Economy.")

The third positive is the availability of labor, equipment and raw materials. The high unemployment rate certainly depresses current spending, but it makes business expansion easier. There are limits to the benefit, as some types of labor are in short supply (such as computer programmers and nurses in rural areas). The softness in demand for capital equipment means that for most types, machinery is readily available. Long lead times persist for oil drilling rigs, mining equipment, and some other specialized machinery, but generally companies face no supply limitations when considering expansion.

The fourth positive factor for the economic forecast is low interest rates. For credit-worthy borrowers, loans are so cheap that they are almost free. Add to that the slight easing of credit standards I wrote about in "Easier Business Credit: 4 Strategies For Corporations And Small Business."

On the negative side of the forecast ledger, the federal government's fiscal difficulties create uncertainty for business. The sequester itself is not a huge negative. (For details on that conclusion, see "Sequester And The Economic Forecast.") However, many people are worried about the huge federal debt, as well as our country's unwillingness to address the problem. That concern constitutes a major contractionary force.

Implementation of the Affordable Health Act ("Obamacare") is causing worry, and worry is often worse than the eventual harm. Finally, there is a dearth of what John Maynard Keynes called "animal spirits." He said that humans had a tendency to action that went beyond the calculation of probabilities and rewards. However, there were fluctuations in this tendency that are beyond our ability to fully understand. Today, the common mood seems to be dour, which itself depresses economic growth.

Combining these factors, my forecast calls for growth in 2013 just a little better than last year, but improving in 2014. The improvement actually begins late this year, but most of its impact is felt in the 2014 growth rate. The average of professional forecasters is a little less optimistic, by about one-half of a percentage point this year, and three-quarters of a point for 2014.

Although the most likely economic outlook is for what I would characterize as light-to-moderate growth, the risk of recession remains, centered mostly in Europe. The Wall Street Journal's survey of economists finds the most common estimate of the odds of a recession in the coming 12 months is 20%, a figure that I concur with. In a nutshell, business leaders in the United States should prepare for a growing economy, but also weigh carefully the risk of recession.