The US economy at the end of 2013 looks much different than it did at the start of last year. And most of the changes are for the better: households are more willing to borrow. Housing is expanding. Businesses are shedding their reticence to hire and invest. And while fiscal issues haven’t gone away, the worst of the drag from government is over.
Some of the changes were evident earlier in the recovery, but their presence was more keenly felt this year. And barring a shock, the positive trends look to continue in 2014. That’s why most forecasters think real GDP will grow close to 3 per cent next year.
Some highlights from the economy’s transformation during last year include:
• Housing found its footings. True, housing has been in recovery since 2011. But 2013 was the year when extremely low interest rates and still-low home prices lifted affordability, while better job growth pulled more buyers into the housing market.
• The grip of deleveraging eased. One of the biggest challenges for the consumer sector early in the recovery was the reduced use of credit, either by choice or constraint. But more households brought out the credit cards again this year, and auto financing boosted vehicle sales. Consumers may have felt more comfortable about using debt because workers felt more secure about their jobs, homeowners saw their home values increase, and wealthier households reaped the benefits of rising stock prices.
• Fiscal drag has pretty much run its course. Fiscal concerns, both real and anticipated, were perhaps the biggest drag on the 2013 economy. Tax increases and sequester spending cuts trimmed about 1.5 percentage points from this year’s real GDP growth, estimates the Congressional Budget Office. That drag will virtually evaporate in 2014, thanks to the latest budget deal.
As political leaders dithered on budget and debt issues, consumers and businesses reacted negatively to how future government policy might affect them. This uncertainty showed up in declines in consumer confidence and a reticence among businesses.
Indeed, that fiscal uncertainty partly explains why – although major corporations were sitting on tons of cash – the business sector remained on the sidelines for much of 2013. Luckily, that wait-and-see attitude seemed to ease toward the end of the year.
Private hiring in October and November was better than the pace over the summer. And capital spending accelerated so far in the fourth quarter after almost no movement in the first three quarters of 2013. In addition, new orders for capital goods jumped in November, a sign that gains in equipment investment will continue into 2014.
In general, the changes in the economy weren’t so much signs of acceleration but that headwinds abated. The hope is that 2014 will see a combination of both: less headwind, especially on the fiscal side, and more momentum, especially from businesses who hold the key to greater equipment spending and hiring.
Given that outlook, we can all raise a glass and look forward to a Happy New Year.
* Dow Jones
