BERKELEY – America’s economy grew much more rapidly than expected in 2013 and appears poised to strengthen further this year. But there is still considerable slack in the labor market, and, as long as it persists, the gains from faster growth will continue to be concentrated at the top of the income distribution, as they have been throughout the recovery.
According to recent BEA estimates, real (inflation-adjusted) GDP grew at a 2.7% average annual rate in 2013, compared to only 2% in 2012. Most forecasters – including the nonpartisan Congressional Budget Office, the so-called Blue Chip consensus, and the Federal Reserve – predict that annual real growth will reach at least 2.8% in 2014.
Despite two recent lackluster employment reports, there are many reasons to expect that growth will accelerate in 2014. The headwinds buffeting the US recovery – impaired household balance sheets, a depressed housing market, and government spending and employment cuts – are dissipating. Household debt has fallen to levels last seen in the early 1990’s, real household net worth has returned to its pre-recession peak, and residential investment as a share of GDP is rising.
Meanwhile, state and local-government budgets are improving, and the federal budget is on track to subtract only about 0.5% from GDP in 2014, compared to 1.75% in 2013. In a Congressional election year, another destabilizing showdown over the federal debt limit is unlikely.