Looking Up in 2014?

Dec 31, 2013 Martin Feldstein

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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Martin Feldstein

Writing for PS since 2008
129 Commentaries

Martin Feldstein was Professor of Economics at Harvard University and President Emeritus of the National Bureau of Economic Research. He chaired President Ronald Reagan’s Council of Economic Advisers from 1982 to 1984. In 2006, he was appointed to President Bush's Foreign Intelligence Advisory Board, and, in 2009, was appointed to President Obama's Economic Recovery Advisory Board. He was also on the board of directors of the Council on Foreign Relations, the Trilateral Commission, and the Group of 30, a non-profit, international body that seeks greater understanding of global economic issues.

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Luis de Agustin Jan 18, 2014

As more likely to disagree with Dr. Feldstein, it's good to be on the same side of the equation on this one.

On this, the US economy, David Ranson, president and head of research of Wainwright Economics & Co. is also on the same side.

Credit spreads keep saying the outlook for world growth has continued to improve in the last couple of months, though less rapidly than earlier. The price of gold in US dollars has been stable or down in the last couple of months. That implies a stronger dollar and a reason for optimism about the US economy relative to the rest of the world. For the US this is the best combination of conditions for performance – as long as it lasts.

The advisor’s first monthly conference call provided clients as much. Ranson expects for 2014, mainly from past-year changes in gold and spreads indicators: improved worldwide growth; temporary speeding up of the US economy; slight decline in government estimates of US inflation; a continuing advance in the US stock market; little change in US interest rates; conditions moderately favorable for B-grade junk bonds and TIPS; near-neutrality for a much wider range of other asset classes, including emerging equity and sovereign debt markets, C-grade junk bonds, and commercial real estate.

The big question is how long will the US mini-recovery last. Wainwright believes the answer should be based on their two selected pivotal leading indicators. Spreads would have to continue narrowing and the price of gold would have to fall further. But spreads have been stabilizing as indeed they had to, given how tight they already are.

Luis de Agustin
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Zsolt Hermann Jan 1, 2014

Of course we don't have prophetic vision to tell what is going to happen next year or beyond.
But we have learned a lot in the last few years through the daily events of the crisis and based on that we can provide some predictions.
More and more people start to understand that constant hquantitative growth in a closed and finite natural system is not possible. And when we talk about natural system it means the human resources too, not only the natural resources usually considered.
And it is these human resources that are already exhausted.
When people talk about aggregate demand it in fact means the brainwashing marketing giving people to produce and consume good, products and services they do not need for a normal, modern human lifestyle.
And they also need means beyond their capacities to maintain the over consumption which drive people and nations into intolerable debt burdens.
If there are no fundamental changes in the way the economy is structured, change in the whole paradigm, lifestyle, societal values we are pursuing, the crisis will deepen to a breaking point beyond which everything becomes unpredictable and volatile.
We simply cannot afford to sit back within the same misguided framework hoping for a nutcase that by doing the same somehow things will turn to the better.
Einstein famously said that problems cannot be solved at the same level they were caused at, we have to change our thinking, or attitude, start a completely new human state starting with education about how to adapt to the global, integral conditions we evolved into, instead of trying to fashion the world around us to or misguided perception.
- Edward Ponderer Jan 2, 2014
  
  I can't but wonder at the seeming detachment of economics from reality on the ground, as mathematics is detached from the given realities of our physical universe. To wit, it was as though one studies cosmology insisting on using Euclidean geometry instead of following Einstein's advice to use the obtuse geometry of Riemann who axiomatic system is more in tune with the reality of space-time curvature.
  
  The world is round, not flat, and it is reaching its market, natural resource, and waste management limits. No gloom and doom because if economy adjusts to actually needs instead of accelerating production detached from the actual needs--in fact devoted to artificially generating "needs," for those products--then the Earth can replenish, heal.
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Procyon Mukherjee Jan 1, 2014

Could not agree more on all the points raised. The looming paradox is striking: the equity markets are roaring while the economy is trudging and the developing economies of the world have passed on the truncheon to the developed, where U.S. is leading the pack with the value-add per capita.

It remains to be seen that when the monetary accommodation starts to mellow down, what are the consequences of the Banking Glut that could follow closely and how the effect of the resultant intermediation on the asset prices (which had helped to prop up some of them) makes wealth effects move to the plateau.

But 2014 can only be stronger, with many tailwinds that could counteract the effects of the headwinds that Mr. Feldstein has chronicled.
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