The U.S. appears to be headed down an economic path similar to that of 2013, with four key influencers in the forecast, according to Dr. Chris Kuehl, economic analyst for the Fabricators & Manufacturers Association, International (FMA):
- The Fed and the financial community as a whole
- The impact of politics
- The reactions of the manufacturer and the general business community
- The consumer
The Fed and Financial Community
The Federal Reserve is going to be faced with some massive issues in 2014 and decisions will be in the hands of a group that doesn't have much experience with one another. Not only will the Fed have a new Chair, as Janet Yellen replaces Ben Bernanke, but there will be a new Vice Chair and only two of the five members of the "permanent committee" will remain – Daniel Tarullo and Bill Dudley. Three new members will need to replace Elizabeth Duke, Sarah Bloom Raskin, and Jeremy Stein.
In addition, members of the Fed's Open Market Committee (FOMC) are scheduled to rotate so that the Dallas, Philadelphia, Cleveland, and Minneapolis Fed presidents are represented. One of those presidents, Sandra Pianalto, is retiring and her replacement is an unknown to the group. Narayana Kocherlakota of the Minneapolis Fed has shaken the Fed to its core by firing or reassigning his entire research staff.
"Yellen is not facing an easy transition," Dr. Kuehl said. "In all likelihood, the Fed's major actions will stay as they have been for the bulk of 2014. No interest rate hikes or changes to the reserve ratio, or even to the interest that banks earn on the money they have at the Fed are likely. The cautious and slow reduction in the bond-buying process is the only real difference that will be observed in 2014."
Banks have started to loosen up on credit and it is likely that this very slow loosening of credit will continue into 2014. Slow and steady provides the banks with a chance to adjust if the outcome is not quite what they expected. Banks are still grappling with the Bank Reform Act and not getting quite the kind of loan applications they had hoped for.
Politics and Political Games
For the third straight year, the political issues affecting the economy will be serious enough to cause a real decline in the economy's overall performance. No real decisions were made in 2013. Everything was simply postponed until January and February of 2014.
Because it is a mid-term election year and control of Congress is at stake, both parties have candidates with far more to fear from a primary than from the general election, and that means doing absolutely nothing to alienate the core.
"This will make deal-making almost impossible, as the candidates will be rewarded for their obstinacy and punished for any hint of flexibility,” said Dr. Kuehl. "Political games will do nothing to help the economy grow and may actually do some real damage, perhaps dragging the GDP growth rate down by half a point over the course of the year."
The news through the last few months of 2013 was actually pretty upbeat. The year-end data on industrial production, capacity utilization, and productivity was respectable, and the data from surveys like the Purchasing Managers Index, Credit Managers' Index, and the various offerings of The Conference Board all trended in a positive direction, leaving the impression that business was building some momentum going into the New Year.
There is one caution, however, the fact that much of the positive data in late 2013 was due to a fairly dramatic inventory build late in the year. Other conditions that bode well for manufacturing production are in place: accessibility of credit has improved, and there is more export demand than ever -- and from a variety of sources. Costs of raw materials are still generally down and labor costs are still low despite the fact that many companies are desperate for the right skilled worker. It is unlikely to stay that way for long.
"By the middle of 2014 costs will likely be rising across the board,” Dr. Kuehl said. "The producers of metal and other raw materials have been reducing production to bring supply in line with demand. Wages will rise for the people needed as they will be in short supply, and any pickup in business will make them that much more valuable. The bottom line is that business has maybe six more months of favorable conditions before the prices start to adjust and rise."
So what about the consumer?
Three things supposedly make the consumer feel ready to start spending again. They traditionally respond to housing prices as these make the homeowner feel a little more financially secure. They also respond to jobless rates because these reassure people that the job they have may last. Last, they respond to the price of gasoline. All three of these are trending in a positive direction, yet the consumer is not acting very motivated.
"It appears that consumers are not being affected by the political crisis that never ends and that they have become deeply skeptical about potential for real recovery,” Dr. Kuehl said. "If that attitude persists, the first quarter will be weak, and a big rebound in attitude is unlikely for the course of the year. This will lead to anemic growth of between 2.5 percent and 3.0 percent."