Solid growth bright­ens eco­nomic out­look for 2014

The Times Herald (Norristown, PA) - - BUSINESS -

WASH­ING­TON — Con­sumers will spend more. Gov­ern­ment will cut less. Busi­nesses will in­vest more. And more com­pa­nies will hire.

Add it all up, and you can see why ex­pec­ta­tions are ris­ing that 2014 will be the best year for the U.S. econ­omy since the re­ces­sion ended 4½ years ago. That’s why the Fed­eral Re­serve is press­ing ahead with a plan to scale back its eco­nomic stim­u­lus.

The op­ti­mists got a boost Thurs­day from a gov­ern­ment re­port that showed con­sumers fu­eled solid eco­nomic growth in the fi­nal quar­ter of 2013. The re­port lifted hopes that the econ­omy will be able to with­stand tur­moil in emerg­ing economies, a pull­back in the Fed’s stim­u­lus and mount­ing risks to the U.S. stock mar­ket over the next 12 months.

Amer­i­cans strug­gling with long-term un­em­ploy­ment and stag­nant pay might not get relief any­time soon. And ar­eas such as man­u­fac­tur­ing, con­struc­tion and home sales re­main far from full health. Still, the out­look for the econ­omy as a whole bright­ened af­ter the gov­ern­ment said growth reached a 3.2 per­cent an­nual rate last quar­ter on the strength of the strong­est con­sumer spend­ing in three years.

“The econ­omy showed real signs of mo­men­tum at the end of 2013,” said Diane Swonk, chief econ­o­mist at Me­sirow Fi­nan­cial. “We are bet­ter po­si­tioned for de­cent growth for 2014 than we were a year ago.”

Con­sumer spend­ing surged in the Oc­to­berDe­cem­ber quar­ter at an an­nual rate of 3.3 per­cent — the best pace since 2010 and a big jump from the 2 per­cent growth rate of the pre­vi­ous quar­ter. Con­sumer spend­ing is par­tic­u­larly im­por­tant be­cause it ac­counts for about 70 per­cent of the econ­omy. For 2013 as a whole, the econ­omy grew a tepid 1.9 per­cent, weaker than the 2.8 per­cent in­crease in 2012, the Com­merce Depart­ment said Thurs­day. Growth was held back by higher taxes and fed­eral spend­ing cuts that kicked in early in 2013.

A bud­get deal Congress ap­proved ear­lier this month halted tens of bil­lions in ad­di­tional spend­ing cuts that were due to kick in this year. With that drag di­min­ished, many econ­o­mists think growth could top 3 per­cent in 2014. That would be the best show­ing since the re­ces­sion ended in mid2009. The strength in con­sumer spend­ing last quar­ter was driven by pur­chases of both durable goods — prod­ucts such as cars, com­put­ers and com­mu­ni­ca­tions equip­ment — and non­durable goods like cloth­ing. Spend­ing on ser­vices also rose strongly.

In ad­di­tion, busi­nesses in­vested in more equip­ment. There was also strength from a shrink­ing trade deficit.

Spend­ing on home con­struc­tion de­clined, though. And gov­ern­ment spend­ing fell at a 4.9 per­cent rate last quar­ter, led by a plunge in fed­eral spend­ing. That was a re­sult, in part, of the gov­ern­ment’s 16-day par­tial shut­down dur­ing Oc­to­ber. The shut­down shrank fourth-quar­ter growth by about 0.3 per­cent­age point, the gov­ern­ment said. Many global in­vestors fear that the Fed’s pull­back in its bond pur­chases will raise U.S. in­ter­est rates and cause in­vestors to shift money out of emerg­ing mar­kets and into the United States for higher re­turns. Cur­rency val­ues in emerg­ing economies have fallen over that con­cern.

In re­sponse, cen­tral banks in emerg­ing economies, from In­dia to Tur­key to South Africa, have been act­ing to counter any dam­age from the Fed’s pull­back and the prospect of higher U.S. rates. They’ve been rais­ing their own rates, hop­ing to con­trol in­fla­tion, lift their flag­ging cur­ren­cies and keep in­vestors from flee­ing. In Ar­gentina, con­sumer prices are soar­ing, the trea­sury is short on for­eign cur­rency, and the peso has suf­fered its sharpest slide in 12 years.

It’s pos­si­ble the tur­moil in those coun­tries could spill into de­vel­oped economies such as the United States’. Over­seas de­mand for U.S. goods might suf­fer, for ex­am­ple. In­vestors might aban­don stocks glob­ally, in­clud­ing in Amer­i­can mar­kets.

But most an­a­lysts think the im­prov­ing U.S. econ­omy will man­age to with­stand any dam­age that might spread from over­seas.

“I don’t think the (U.S. econ­omy) is ter­ri­bly vul­ner­a­ble, as­sum­ing it doesn’t rock fi­nan­cial mar­kets in a deep way,” said Joshua Fein­man, global chief economist­with Deutsche As­set and Wealth Man­age­ment. “What we’re see­ing in places like Tur­key, South Africa and Ar­gentina I don’t think mat­ters all that much in the U.S. ... The U.S. does seem to be gain­ing strength of its own do­mes­ti­cally. And Europe is at least sta­bi­liz­ing.”

The solid U.S. eco­nomic growth in the Oc­to­berDe­cem­ber quar­ter fol­lowed an even stronger 4.1 per­cent an­nual growth rate in the July-Septem­ber quar­ter. But that surge was due to a huge buildup in busi­ness stock­piles that slowed dur­ing the fourth quar­ter.

The 3.2 per­cent es­ti­mated growth rate for the econ­omy last quar­ter was the gov­ern­ment’s first of three pro­jec­tions of gross do­mes­tic prod­uct for the Oc­to­ber-De­cem­ber quar­ter. GDP mea­sures the econ­omy’s to­tal out­put of goods and ser­vices.

This year, econ­o­mists think the econ­omy will get a lift from con­tin­ued gains in hir­ing. Fur­ther steady job growth would give more house­holds money to spend and help in­crease con­sumer spend­ing.

In ad­di­tion, U.S. man­u­fac­tur­ers are ex­pected to gain from ris­ing global de­mand. And hous­ing con­struc­tion and auto sales are ex­pected to strengthen fur­ther in 2014.

Many an­a­lysts think the Fed will keep par­ing its sup­port at each of its meet­ings this year un­til it elim­i­nates new bond pur­chases en­tirely in De­cem­ber. In mak­ing the an­nounce­ment, the Fed cited an im­prov­ing econ­omy, in­clud­ing more strength in con­sumer and busi­ness spend­ing.

AP File Photo

Em­ploy­ees at Sh­effield Platers Inc. work on the fac­tory floor in San Diego. The Com­merce De­part­ment re­leased fourth-quar­ter gross do­mes­tic prod­uct on Thurs­day.

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