I could have used the same title for this post as I did for the December release of the Industrial Production numbers titled "The Economy Seems to be Picking Up Steam."
Fourth quarter GDP growth, year-over-year, came in at 2.7 percent. This was up from 2.0 percent in the third quarter; 1.6 percent in the second quarter; and 1.3 percent in the first quarter. These numbers indicate that the economy is improving… even if only marginally… every quarter.
So, we have the picture of the economy picking up steam throughout the year.
I like to use year-over-year figures because the quarterly growth rates need to be multiplied by four and this can exaggerate a quarterly increase that includes some unusual occurrences. For example, rate of increase from the third quarter to the fourth quarter of 2013 was 0.8 percent… not very noteworthy.
But, multiplying this number by four gives one an annual rate of growth of 3.2 percent, something that is much more newsworthy.
In my earlier post, cited above, I indicated the same thing for the Industrial Production figures. The fourth quarter of the year was higher than the previous three quarters, again seeming to indicate that the economic growth was accelerating… even if only modestly.
I know that most would like the pickup to be more robust and happen sooner. The psychic cost to the population faced with unemployment, foreclosure, and uncertainty is quite high. Policymakers should think of this cost when they are too energetic in stimulating the economy on the other side of the financial collapse. But, that maybe is too much to ask of our "greedy bastards"… our elected officials.
The economy seems to be "picking up steam" but it is doing so incrementally.
Looking at year-over-year fourth quarter growth rates we see the 2.7 percent rate of increase this year exceeds the same measure for 2012, which was 2.0 percent. In the fourth quarter of 2011, the year-over-year growth rate was also 2.0 percent.
In 2010, the first full year after the end of the Great Recession the growth rate was 2.8 percent. It is not untypical to have the first year after the end of a recession experience the high point or near the high point of the recovery.
The thing that everyone recognizes, however, is that growth pulling out of the Great Recession was more modest than any other post-World War II recovery. This just highlights, I believe, the dislocations in the job markets, the over-commitments built up by business in the earlier 2000s, and the debt overhang from all the credit inflation created by the federal government.
The economy is recovering, and, I believe, will continue to do so.
What might the year-over-year growth rate for the economy be in 2014? I want to put this figure in the 3.0 percent to 3.3 percent range. Continued steady recovery, but not of the exuberant kind.
As I have stated before, I believe that you will have rising longer-term interest rates and this will tend to modify possible spending increases. Unemployment, as it is measured now, will continue to decline. And, in this scenario, which I contend is the most likely, I think that price increases will be modest, maybe even some continued disinflation, but no deflation. Included in this might be a continued drop in the labor force participation rate.
This is not to say there are not dark clouds hanging overhead that could disrupt this picture.
One of the biggest uncertainties of the year is connected with the Federal Reserve. It has never had to exit a situation similar to the one we are experiencing. We have a new leader at the Fed and, given the condition of the economy, continuing to reduce the rate at which the Fed is purchasing bonds is highly uncertain.
And, now you have people around the world, most notably this past week, Raghuram Rajan, the Governor of the Reserve Bank of India, and formerly a professor of finance at the University of Chicago, who called the United States extremely selfish in conducting monetary policy solely in the interest of the United States.
In other words, the current reduction in the rate at which the Federal Reserve is purchasing bonds from the open market is being pointed at as the reason why the currencies of several emerging markets have come under selling pressure over the past week and one half. Rajan's comments were just one of the voices being heard from emerging countries and was the more published.
This turmoil has had a negative impact on the United States stock market, but a positive effect on the bond market. We are once again in a risk on/risk off situation in which risk averse money is heading into the United States… and Germany.
This upheaval has raised attention to the possibility that many emerging nations could experience a slowdown in economic growth during the year, which would have repercussions in the United States. Furthermore, the talk about deflation in Europe has been growing and this could have impacts on growth here in America.
One could argue that one of the benefits of the incremental increase in economic activity in the United States is that it will not put into play all of the liquidity that the Federal Reserve has pumped into the banking system. Some day we are still going to have to deal with this. This just adds to the argument that the actions of the Federal Reserve over the next several years are a huge unknown for the financial markets and the economy.
So, there are known unknowns that we need to watch out for during this calendar year and there are always unknown unknowns that could always pop up.
Given all these caveats, I still will stick with my forecast for 2014 at this time. It is the best one that I can make at this particular time. The only thing I can add to this is to "stay loose." Things could change at any time and in any place.