The good news about 2014 (maybe)
By Robert J. Samuelson, Published: December 29
For four and a half years, we have waited for a powerful and self-sustaining economic recovery. More than once it seemed imminent. Then, for various reasons, it vanished, and we returned to a plodding expansion with too much unemployment and too little confidence. Could 2014 be the year when the recovery actually feels like a recovery? Well, it could.
I say this with humility. True, many forecasts have turned optimistic. Economic growth will (finally) accelerate. But similar predictions were made in the past, including by me, and were wrong. The same could happen again. Still, the case for a healthier recovery now seems the most plausible since the recession’s nadir in mid-2009. The reason: Many economic “fundamentals” are improving simultaneously.
Here are four.
● The job market has strengthened. In the past four months — August through November — non-farm payrolls have increased to an average of 204,000. That’s up from a monthly average of 180,000 for the first seven months of the year. Given how reluctant companies have been to hire, the gains suggest rising confidence. Since employment’s low point in February 2010, the economy has added 7.4 million payroll jobs.
● Household debt is down, wealth is up. The recovery’s weakness has reflected many Americans’ need to rebuild their finances. Having over-borrowed, they repaid debt; facing a collapse in housing and stock prices, they increased savings. All this hurt consumer buying, as income shifted away from shopping.
But the drag is now lessening. Since late 2008, household debt has dropped about $800 billion, reports the Federal Reserve. Along with low interest rates, this has cut household debt payments (principal and interest as a share of disposable income) to the levels of the early 1980s, says economist Scott Anderson of Bank of the West. Meanwhile, higher stock and home prices boosted household net worth to $77 trillion in September, well above 2007’s $68 trillion.
● The housing recovery isn’t finished. Jason Furman, chairman of President Obama’s Council of Economic Advisers, notes that the underlying demand for new homes totals about 1.5 million units annually. This reflects new household formations of about 1 million along with demolitions and abandonments. Yet, housing starts in 2013 are estimated at only about 900,000. Scarce supply, says economist Lawrence Yun of the National Association of Realtors, has kept inventories of unsold homes at low levels of about five months of sales instead of the more normal six to seven months.
● Corporations are awash in cash, meaning they can easily finance new investment in buildings, equipment and software. Until now, the cash hoard signified that companies wouldn’t increase industrial capacity because sluggish sales didn’t justify expansion. Since 2007, corporate cash and short-term securities have doubled from $600 billion to $1.2 trillion, reports Howard Silverblatt of Standard & Poor’s. But companies’ reluctance to invest may be waning.
Consider: In the latest quarter, capital spending at companies in the S&P 500 stock index passed its earlier peak. General Motors will invest $1.3 billion in five U.S. plants; Boeing is seeking a factory site for its redesigned 777 jetliner. Economist Joseph Carson of AllianceBernstein expects business capital spending in 2014 to grow 9.6 percent for buildings and 8.1 percent for machinery and software, sizable gains over 2013’s 1.7 percent and 2.7 percent. With these increases, Carson expects overall economic growth (gross domestic product) to accelerate to between 3 percent and 4 percent annually. That’s a significant jump from the roughly 2 percent rates since 2010.
There are other favorable omens. Global trade is reviving. Closer to home, the federal budget is expected to dampen growth less than in 2013. With all this encouraging news, confidence should be improving — and polls suggest it is. In December, the University of Michigan’s Survey of Consumers rose nearly 10 percent. A weekly survey of business sentiment among managers by Moody’s Analytics found the mood to be the best “since the survey began 11 years ago.”
Now, a caution.
A better recovery presumes that consumers and companies respond to good news as in the past. But they may not. The Great Recession changed attitudes and behavior because it was both unexpected and devastating. Though jobs are up, they remain about 1.3 million below the record. Millions of would-be workers (almost 5.7 million, estimates the Economic Policy Institute, a liberal think tank) have left the labor force. Americans have been sobered. The resulting wariness may be self-fulfilling. Initial reports of holiday shopping were mixed.
All that’s certain is that the economy will (again) be a big story in 2014, affecting America’s politics and psychology. Happy New Year, everyone.