5 Reasons 2014 Is Looking Good for the U.S. Economy

Here are five reasons why things in the U.S. are looking up.

Although GDP increased 4.1 percent in December, expectations are low for the modest recovery to change everyday life.

The U.S. is projected to achieve GDP growth of 3.5 percent.

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The U.S. economy appears poised for its best performance since the depths of the recession in 2008 and 2009. After four years of modest recovery, the economy has largely mended from the injuries received during the financial panic. Here are the top five reasons why the U.S. in 2014 may post 3.5 percent real GDP growth or better.

1. Deleveraging is in the past: Recoveries from financial disasters generally are more difficult and take longer than a recovery from a cyclical economic correction. This is because financial disasters expose fundamental weaknesses in the over-extended balance sheets and spending habits of nearly every sector, from corporations to consumers to regional and local governments. During the multi-year period of financial rebalancing – otherwise known as deleveraging – monetary policy is relatively ineffective to encourage more rapid growth. Each sector of the economy is, in its own way, myopically focused on getting its debt reduced and its spending in line with future income. For the U.S. economy, this process has taken nearly four years from the bankruptcy of Lehman Brothers and bailout of AIG in September 2008. Now that the rebalancing and deleveraging process is largely complete, the U.S. economy is ready to grow at a healthy pace.

2. Fiscal and regulatory drag is diminishing: The U.S. federal budget deficit was vastly expanded at the end of President George W. Bush’s second term with Treasury Secretary Paulson’s $1 trillion emergency spending request to combat the financial crisis. After a short debate, prior to the November 2008 presidential election, Congress approved this spending. The federal budget deficit peaked in fiscal year 2009 at $1.4 trillion (approaching 10 percent of GDP). Since then, substantial progress in deficit reduction has been made. For fiscal year 2013, the federal deficit was $680 billion (4 percent of GDP). And for fiscal year 2014, we are projecting a federal deficit of "only" $500 billion (3 percent of GDP).

[See a collection of political cartoons on the economy.]

By fiscal year 2015, we expect the U.S. government to have achieved a fully balanced operating budget, which excludes interest expense (about 2 percent of GDP). Even more importantly, U.S. federal budget deficit reduction is being accomplished with much higher tax revenues (up 8 percent  in fiscal year 2013 over fiscal year 2012) and expense stability (essentially flat in fiscal year 2013 over  fiscal year 2012). The higher tax revenues are a surprise to many analysts, but they reflect the healthy recovery of the private sector that has been obscured in the employment data by job losses in the state and local government sector.

3. The worst is over for Europe: Our last point concerning the diminishing headwinds from past problems revolves around the global context in which the U.S. economy operates. Global factors have weighed heavily on economic growth in the U.S. over the past few years, and even more heavily on emerging market countries. The prime culprit has been Europe. The economies of the eurozone are a critical leg of global growth. Europe is China’s largest trading partner and represents important sources of demand for goods from every other region.

Europe had an extremely severe reaction to the 2008 financial panic, because the sovereign debt of some of the weaker economies in the eurozone had grown so large. But the good news for the U.S., China and other emerging market nations is that the economies of the eurozone nations are no longer shrinking and that some small, incremental economic growth is likely in 2014. 

[Check out 2013: The Year in Cartoons.]

4. Fed signaling has turned positive: The positive monetary policy event at the end of 2013 came with the Federal Reserve’s decision to abandon its view that the U.S. economy needed life support. Technically, what the Fed decided at its December 2013 Federal Open Market Committee meeting was to begin to taper its emergency asset purchase program known as quantitative easing. The tapering will be incremental and last most of 2014, economic conditions permitting. What the equity markets heard, however, was the strikingly different tone of analysis from the Fed. The Fed had finally become positive on the economic future.