BNA Survey Finds Economy Strengthens In 2014 as Housing, Consumers Brighten

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By Diana I. Gregg, Larry Swisher , Claire Compton , and Ben Penn  


The U.S. economic recovery will accelerate next year, helped by the housing market, a brighter consumer outlook, and moderately stronger job growth, according to a BNA survey of well-known forecasters.





Real gross domestic product growth will reach 2.8 percent next year from just 1.9 percent estimated for this year. Measured from fourth quarter to fourth quarter, the improvement is more obvious, as real GDP is expected to grow 2.3 percent this year, then 3.1 percent, according to the consensus forecast from 19 economists.

Unemployment is expected to fall to an average 7 percent next year from an average 7.5 percent this year as job growth gains strength from an average 167,000 a month in the second half of this year to 190,000 a month in the first-half of 2014.

About two-thirds of the economists expect the Federal Reserve to wait until 2015 to raise the target for the federal funds rate for the first time.

Inflation will remain tame, with the consumer price index rising 1.6 percent this year, then 1.9 percent, which is lower than the Fed's 2 percent target.

Among the most upbeat forecasters is Joel Naroff, president of Naroff Economic Advisers, who expects real GDP growth to reach 3.6 percent next year, second only to the 3.8 percent forecast by JPMorgan Chase & Co.

End of Fiscal Drag, More Income

Naroff said the fiscal drag--the end of the payroll tax holiday, higher taxes for the upper-income households, and sequestration--took “at least 0.5 percentage point out of growth this year [and] you have to, in essence, add that back in next year.” He also expects the unemployment rate to be “pushing 6.5 percent by next summer” which means there will be good-size wage gains. “And that's the part of the puzzle that's totally missing from the economy--it's income growth,” he told BNA.

Those two key factors combined, “a sharp reduction in the fiscal drag and an acceleration--which wouldn't take much--in wage gains, and the two together by themselves will probably add at least 1 percentage point to growth, and that gets you over 3 percent,” Naroff said.

Lynn Reaser, chief economist of Point Loma Nazarene University, San Diego, is right at the consensus with 2.8 percent growth next year. She said that although growth has remained subpar, the pluses in the economy at this point outweigh the negatives.

“The economy remains very volatile,” Reaser said. “The sequestration's impact has not been as severe as might have appeared. The payroll tax increase also appears to have been offset significantly by capital gains increases in both the stock and housing markets and moderate job growth.”

The primary negatives have been the ongoing recession in Europe, which is a negative for U.S. exports; fiscal tightening; and uncertainty about Obamacare and its costs, particularly whether it will affect hiring by small companies, Reaser said. The pluses include housing and the stock market gains, the highly accommodative monetary policy, the boom in oil and natural gas production, and the release in pent-up demand, particularly for autos, she added.

“The pluses in the economy seem to be offsetting the constraints,” Reaser told BNA. “The second quarter is likely to be very slow but we're likely to see better economic growth moving into 2014.”


“The pluses in the economy seem to be offsetting the constraints. The second quarter is likely to be very slow but we're likely to see better economic growth moving into 2014.”



Lynn Reaser,
chief economist, Point Loma Nazarene University

Real GDP grew 1.8 percent in the first quarter, revised down from 2.4 percent reported earlier, mostly due to lower consumer spending ((123 DLR D-1, 6/26/13).

Diane Swonk, chief economist of Mesirow Financial, expects growth next year of 2.4 percent, or 2.8 percent when measured from fourth quarter to fourth quarter, which is below the BNA survey consensus.

'Frustratingly Fragile.'

“The economy has some animal spirits but is still frustratingly fragile,” Swonk said. “We are nowhere near cruise control, and I worry that the slowdown in China may be a greater threat than Europe at the moment.”

IHS Global Insight is above the consensus of the survey for growth next year, whether measured as an annual average (2.9 percent) or fourth quarter to fourth quarter basis (3.5 percent).

Gregory Daco, senior principal economist at IHS, said the one “major headwind” for the U.S. economy this year is the fiscal drag; without it, growth would be closer to 3 percent than the 1.8 percent the firm is predicting. For next year, they recently lifted their forecast a bit, to 2.9 percent from 2.8 percent, which he said was due to the fact they now see a slightly higher path for housing and for consumer spending.

“The underlying evidence seems to be robust,” Daco told BNA. “The employment picture is improving, at a moderate pace, but it is improving and that's the important part. The housing sector is showing evidence of an ongoing and lasting rebound. It's boosting growth, directly and indirectly.”

“We think the tax increases at the beginning of the year sapped a lot of growth early” and the federal budget sequester has compounded the problem, said Ken Matheny, senior economist with Macroeconomic Advisers LLC. At the same time, “there also have been substantial increases in wealth” from home values and equities, which have boosted consumer confidence and balance sheets.

The Fed's Flow of Funds report for the first quarter showed the largest gain in household net worth in over a decade, $3 trillion, with well over half of that from equities and the rest from higher home prices, Matheny noted.

“The health of the consumer sector is really coming back,” Matheny told BNA. And, he said, businesses “are a little more optimistic and a little less worried about downside risk.”


“The economy has some animal spirits but is still frustratingly fragile. We are nowhere near cruise control.”



Diane Swonk, Mesirow Financial chief economist

Looking ahead, Macroeconomic Advisers expects real GDP growth will accelerate to 3.1 percent next year, and 3.3 percent when measured fourth quarter to fourth quarter--both of which are above the consensus of the BNA survey.

Wells Fargo chief economist John Silvia explained the thinking behind his relatively slow growth forecast of 2.1 percent for next year as one in which “the good sectors aren't that great and there are some sectors that continue to drag it down.”

Public Sector Struggling

“I would still say that the local and federal governments are still going to be cutting spending. That will probably be the biggest negative,” Silvia said. “When looking at business investment, spending has definitely moderated.”

Meanwhile, “housing has improved, consumer [spending] continues to be okay,” Silvia said. But “net exports continues to subtract a tenth or two from GDP for us.”

“The important thing is that everything in the private sector is contributing to growth,” Silvia emphasized. “It really is the public sector that continues to struggle.”

Some economists interviewed for this report pointed to the trade sector as not helpful at this point, even though the crisis in the eurozone is less severe than a year ago.

“I'm not seeing much improvement right now,” Daco said. “Right now the economic picture in Europe is not good, a long yet mild recession, six consecutive quarters of negative growth. We expect it to gradually improve as we go into 2014. With China, we're also seeing not-so-encouraging signs on the growth front and indications the landing could be a little bumpier than expected.”

The foreign sector is expected to improve but will not be a “source of extraordinary growth,” Matheny said.

Most of the economists surveyed do not expect the Fed to begin raising its target for the overnight federal funds rate until 2015. The responses were received before the June 18-19 Federal Open Market Committee meeting.


“I don't think they will start unwinding anything until inflation is going back up, because that's their ultimate mandate.”



James Glassman,
managing director JPMorgan Chase & Co.

At the conclusion of that meeting, Fed Chairman Ben Bernanke indicated that the central bank would begin to reduce its $85 billion a month bond purchases later this year and end them completely when the unemployment rate falls to 7 percent, which the central bank thinks will happen by mid-2014. The unemployment rate is 7.6 percent now.

The guidance on the federal funds rate continues to be no rate increase until the jobless rate hits 6.5 percent and inflation remains well-behaved, Bernanke observed.

'Hidden Unemployed.'

James Glassman, a JPMorgan managing director and head economist for the commercial bank, thinks Fed policymakers will hold off until the second quarter of 2016 before raising rates. That is because he believes the unemployment rate will take longer to decline due to the large number of “hidden unemployed” particularly in the 16-40 age bracket.

“For the Fed, their cue right now is a falling unemployment rate but that fall has been exaggerated,” Glassman told BNA. Moreover, it will be important to see whether inflation moves up, he said.

“I don't think they will start unwinding anything until inflation is going back up, because that's their ultimate mandate,” Glassman said.

The Fed's central tendency, in the forecast released June 19, is for inflation to rise gradually towards their 2 percent long-run objective, from 0.8 percent to 1.2 percent this year to 1.6 percent to 2.0 percent by 2015.

Glassman pointed out that the central bank's task will be complicated by the impact on long-term rates of tapering bond-buying.

“The minute the Fed signals it's going to back away from asset purchases, long-term interest rates are going to rise up to normal levels, and when that happens it's going to make them more cautious about adjusting the funds rate until they see how the economy responds,” Glassman said. He said his forecast was not altered by the June 19 FOMC announcement.

Meanwhile, Deutsche Bank expects to see the first rate hike in the first quarter of 2015.

“We're expecting unemployment below 6.5 percent in the fourth quarter of next year,” said Brett Ryan, associate economist for Deutsche Bank Securities. “At that point, barring any exogenous shocks to the economy, we should be in a good position where growth has accelerated enough that the Fed can start raising the rate.”

The BNA consensus forecast for the unemployment rate to average 7.5 percent in 2013 would be an improvement over the actual average of 7.7 percent for the year through May, and the 7 percent seen on average for 2014 is even lower.


“If we were to get some relief from sequestration, if they smoothed that down a bit, it would be an upside risk to the forecast.”



Brett Ryan,
associate economist, Deutsche Bank Securities

On the other hand, the consensus prediction for average monthly employment gains of 167,000 jobs per month in the second half of this year is less than the 187,000 jobs per month added on average in the first five months of the year. But coincidentally, the outlook for the first half of 2014 is for a return to exactly that rate of growth: 190,000 jobs per month.

Swonk, with Mesirow, expects unemployment to remain at or above 7 percent through 2014 despite a modest pickup in job growth to 175,000 per month in the first six months of next year.

One reason why the unemployment rate won't fall further is that some discouraged or “missing workers” are expected to return to the labor market but to have difficulty finding jobs right away, as happened in May, when the jobless rate rose to 7.6 percent from 7.5 percent in April, Swonk told BNA.

Not Like Past Recoveries

Macroeconomic Advisers thinks monthly payroll gains will slow during the rest of this year, but increase to an average of 190,000 jobs per month in the first half of 2014, “but we still don't forecast the large employment gains we've seen in past recoveries,” Matheny said. “We don't have anything remotely like” the 300,000 to 400,000 jobs per month that the economy added at times during the recovery from the last severe recession in the early 1980s.

“There's a virtuous cycle we'd like to kick off,” Matheny said. On the one hand, “you need confidence on the part of businesses so they're willing to hire,” and on the other, consumers need to see better job growth to become more willing to spend. Right now that process of mutual reinforcement “is working at a pretty sedate pace,” he added.

Asked about risks to the outlook, Matheny told BNA that “near the top, if not at the top of the list” of concerns is an overseas event with potential spillover effects to U.S. financial markets. Such a threat could take two forms--either a terrorist attack or a major conflict in the Middle East--or a worsening situation in the eurozone or weaker growth in China, he said.

Daco, with IHS, also named the recession in Europe and weaker-than-expected growth in China as risks to the U.S. economy.

For his part, Ryan, with Deutsche Bank, pointed to risks from geopolitics, such as in Iran or North Korea, some re-emergence of sovereign debt concerns, and a monetary policy “misstep.”

Housing Could Beat Expectations

But there are upside risks, too, Ryan said. That would include a more favorable budget deal.

“If we were to get some relief from sequestration, if they smoothed that down a bit, it would be an upside risk to the forecast,” Ryan told BNA. “If housing were to accelerate faster than we have forecasted it to, it would certainly be a positive as well. But right now we're expecting a good amount from housing.”

The responses from the forecasters were received June 5-17.