America’s Move to Faster Growth

CAMBRIDGE – Last December, I speculated that GDP growth in the United States would rise in 2014 from the subpar 2% annual rate of the previous four years to about 3%, effectively doubling the per capita growth rate. Now that the US economy is past the impact of the terrible weather during the first months of the year, output appears to be on track to grow at a healthy pace.

The primary driver of this year’s faster GDP growth is the $10 trillion rise in household wealth that occurred in 2013. According to the Federal Reserve, that increase reflected a $2 trillion increase in the value of homes and an $8 trillion rise in the value of shares, unincorporated businesses, and other net financial assets. As former Fed Chair Ben Bernanke explained when he launched large-scale asset purchases, or quantitative easing, that increase in wealth – and the resulting rise in consumer spending – was the intended result.

Past experience suggests that each $100 increase in household wealth leads to a gradual rise in consumer spending until the spending level has increased by about $4. That implies that the $10 trillion wealth gain will raise the annual level of consumer spending by some $400 billion, or roughly 2.5% of GDP. Even if less than half of that increase occurs in 2014, it will be enough to raise the total GDP growth rate by one percentage point.