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This forecast discusses the current state of the US economy, including unemployment, government spending cuts, private sector investment, housing market, business sector, and exports. It provides a realistic outlook for 2013 and 2014, predicting slow growth and a gradual reduction in unemployment.
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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)
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? • Growthin 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…