What Will The Economy Look Like In 2014?

Includes: DIA, QQQ, SPY
by: e21

Last week, our readers made predictions about where the economy will go in 2014 by voting in the weekly e21 Asks poll. Many voters felt as if 2014 will not be much different from 2013: 46 percent responded with "Similar to 2013: staying afloat but still recovering." The race for second place was essentially tied, with "GDP will grow, unemployment will stay high" edging out "Another crash leads to a recession" by just two percentage points. Very few voters predicted an economic revival in 2014: only 2 chose "robust growth leads to economic boom."

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It would be difficult to blame many voters for thinking 2014 will follow 2013's tepid growth. Congress seems unlikely to pass any major reforms that would have a significant effect on economic growth since Congress passed historically few bills in 2013. Congress missed a number of opportunities to boost economic growth through legislative reform, including boosting the labor force participation rate and tackling entitlement reform. The Ryan-Murray budget compromise might be viewed as the biggest piece of legislation passed this past year, but it only altered government spending by one percent. More ambitious plans are needed to put the United States on a sustainable fiscal path.

Another major concern is the low labor force participation rate. The current rate of 63 percent (the same level as 1978) is due to many factors, including onerous economic regulations that lower entrepreneurship (occupational licensing), laws that make it more difficult for young workers to gain experience (the minimum wage), and policies that reduce incentives to find employment (extended unemployment insurance).

However, there still may be some hope for progress from Congress and the workforce in 2014. Speaker John Boehner (R-OH) may bring immigration reform to the House floor on a piecemeal basis, and Rep. Paul Ryan (R-WI) has said the House Ways and Means Committee hopes to overhaul the tax system in 2014. America's international competitiveness is suffering due to a broken immigration system that excludes foreign entrepreneurs, high-skilled, and low-skilled workers alike. Our marginal corporate tax rates are among the highest in the developed world. This makes it unappealing for companies to invest money they earn overseas in the United States.

Shadow Open Market Committee member Peter Ireland wrote an economic forecast for the upcoming year in a December piece entitled, "2014 Might Be Better than You Think!" His research found a strong link between a certain measure of money supply (Divisia M1) and future outputs and prices. Growth in the Divisia M1 money supply slowed right before the last three recessions, but has since recovered and now looks to be above historical standards. Ireland also cited the stock market's strong performance in 2013, specifically the 25 percent growth in the S&P 500.

Whatever occurs, one can only hope politicians avoid the temptation to enact legislative "fixes" that only further involve the government in economic affairs. Past intrusions on markets have created perverse incentives that led to recessions and hobbled recoveries. Allowing free enterprise to prosper within reasonable bounds, especially in the energy sector, has long been the engine of the American economy.

We stress cautious optimism for the coming year. The economy is gaining ground despite the antics of the federal government. Faith in the American workforce is not naïve. As Peter Ireland concluded, "Often before, America has been temporarily set back, but, every time, an extended period of renewal and growth has followed. History provides us with the best reason to be optimistic about the year ahead."