Looking Up in 2014?

The US economy will continue to face considerable risks in 2014, owing to the effects of higher interest rates and uncertainty about taxes. But the US now has a better chance of achieving significantly higher real GDP growth than at any time since the downturn began.

CAMBRIDGE – For the past six years, I have been skeptical about the standard optimistic forecasts of the pace of US economic growth in the year ahead. Where most forecasters and policy officials saw green shoots and reasons for confidence, I saw strong headwinds that would cause an economic downturn and then a subpar recovery.

But I think the evidence for 2014 is more balanced. Although there are serious risks facing the US economy in the coming year, there is also a good chance that growth will be substantially stronger than it has been since before the recession began.

The economy was still expanding in the late summer of 2007, when I spoke at the US Federal Reserve’s annual Jackson Hole conference about serious risks to the economic outlook. I warned that house prices had begun to fall in the summer of 2006 from dangerously high levels, implying a future collapse of construction activity and large losses of household wealth. Reduced household wealth would lead, in turn, to lower consumer spending, further depressing GDP.

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