2013 is over. There was a lot of good (have you looked at the stock market?) and a lot of bad (think Washington, DC). There were lots of highs—the stock market again—and lows, such as the EU’s decision to hit Cyprus depositors. Overall, it was a pretty typical year in many respects, although of course we get different highs and lows every year.
2014 will be different. 2013 started with angst and a broken budget; 2014 starts with a smoothly negotiated (if rather minimal) budget deal. 2013 started with worry about fiscal collapse and an exploding deficit; 2014 starts with the deficit projected to decline to below the growth rate of the economy. 2013 started with zero growth; 2014 starts with the most recent quarterly growth figures above 4 percent.
These are big differences, but they really only touch the surface of the changes we can expect to see in 2014. All four sectors of the economy (consumers, government, business, and net exports) are set to improve at the same time—a significant difference from 2013.
Let’s start with employment. While still too high, unemployment numbers declined more than anyone, including the Federal Reserve, expected in 2013. If current trends continue—and they’re likely to accelerate—we can reasonably expect unemployment to continue to drop. Since we’re now approaching normalized levels, wage growth should also start to accelerate.
The reason this will be different in 2014 is that we saw an atypically low level of wage growth in 2013, given the change in unemployment. This can reasonably be explained by the high level of initial unemployment, but, as I stated above, we’re now at levels where wage growth should pick up.
In turn, consumer spending can continue to accelerate. Representing more than two-thirds of the economy, it will continue to support faster growth and act in a virtuous circle to further increase employment. Further support from consumer spending will also come as we start to borrow again. Consumers have been delevering—that is, paying off debt—for the past several years, which has been both necessary and constructive, but it has also slowed the recovery. That will change.
The differences won’t be limited to consumers. Government is also set to shift from a headwind to, if not a tailwind, at least a neutral factor. With the current bipartisan spending deal easing the pending sequester spending cuts, we will see federal government spending continue at around current levels, while state and local government budgets will continue to recover. With government knocking more than 1 percent off of potential GDP growth in 2013, this is a very big difference for 2014—and one that is all to the good.
For business, one of the serious worries about this recovery has been the low level of investment in capital goods, in productive capacity. This has been slowly picking up over the past quarter or so, and with productive capacity now being used at normalized levels, businesses will need to continue to invest. This is important not only for current growth but also for future growth. Capital investment has been running at abnormally low levels for the past several years; given the signs that the catch-up is under way, along with the growing need to invest, 2014 could benefit substantially.
Finally, for exports, the energy revolution in oil and gas continues to improve U.S. trade statistics. If exports are greater than imports, the economy benefits. The growth in exports of all kinds, and the significant reduction in energy imports, has contributed to growth in 2013 and should do so even more in 2014.
Overall, while 2013 was a recovery and rebuilding year, to use a sports metaphor, 2014 has the potential to be something better. Although concerns remain, of course, many of the signs are pointing in the right direction, and that is probably the biggest difference between 2013 and 2014.