While some had expected a quick recovery from the recession, that was never likely to be the case. Recessions that are caused by financial crises are different from the usual downturns – they are more severe, they last longer, and the recoveries take a long time. The economy has been in recovery mode for the last four and a half years, but finally appears to be poised for an acceleration in 2014.
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According to the National Bureau of Economic Research’s Business Cycle Dating Committee, the recession officially ended in June 2009 (that is, that the economy stopped contracting). The recession lasted 18 months (vs. a 10.4-month average for the ten previous recessions), the longest of the post-war period. Inflation-adjusted GDP was roughly 7.4% below its potential. Growth over the last four years would not have been bad if we were at full employment, but we’re not. We’ve made up only a fraction of the ground that was lost during the downturn.
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In a few months, private-sector payrolls are expected to surpass their previous peak from six years ago. However, we would have expected about nine million additional jobs over the last six years if the economy had not fallen into the recession. Hence, we are a long way from a full recovery in the job market. Note that the aging of the population means that we should expect a slower pace of job growth in the years ahead (due to declining labor force participation). However, we still have a lot of ground to make up over the next few years. Furthermore, recall that the economy of the late 1990s showed that the labor market is flexible. Good wages and salaries will prompt some retirees and stay-at-home spouses to return to the workforce.
A year ago, real GDP might have been projected to grow 3.5% or more in 2013 except for one thing – tighter fiscal policy. This year, federal fiscal policy will be much less of a drag on GDP growth and will likely be offset by an expansion in state and local government. The deficit has fallen sharply (to about 4% of GDP in FY13, vs. 9.8% of GDP in FY09), but most of that improvement reflects a recovery from recession (improved revenues, less recession-related spending), not austerity. State and local government was a major headwind in the early part of the recovery, but should add a little to GDP growth in 2014.
The global economy was surprisingly soft in 2013, but appeared to pick up in the second half of the year. We should see further improvement in global growth in 2014, although the pace is not expected to be especially strong. Still, U.S. trade figures appear to show improving trends in both imports and exports following flat trends in 2012 and the first half of 2013.
The housing sector was the largest headwind in the recovery. Homebuilding activity is still a relatively small portion of GDP, but a continued recovery in residential construction should add 0.4 percentage points or more to 2014 GDP growth. Moreover, the increase in home prices has pulled many homeowners above water on their mortgages and the wealth effect has contributed to consumer spending growth. The main concern for 2014 will be monetary policy. The reduction and end of the Fed’s asset purchase program need not push long-term interest rates substantially higher. The Fed’s emphasis on the forward guidance should prevent long-term rates from rising too rapidly. Chairman Bernanke had stressed the forward guidance when he began talking about a taper last June, but the inclusion of this sentiment in the December policy statement went a long way in convincing financial market participants of that commitment.
The economic outlook is typically viewed as a summation of forces pulling in different directions. The headwinds of the last few years have faded and many have turned into tailwinds. The U.S. economy is poised for better growth in 2014.
© Raymond James
