Economic forecast 2014: Mostly cloudy

Most economists are forecasting an increase in economic growth next year. A look behind the numbers shows that may not be true. Photo: Long line at a job fair/ AP

WASHINGTON, December 30, 2013 — Many economists forecast economic growth in 2014 in the 3 to 4 percent range. This is a significant increase over the roughly 2 percent growth that we have seen for the last four years, since the recession officially ended in mid-2009. But is that forecast realistic?

A number of factors suggest it is. From August to November, the economy added about 204,000 jobs per month. This is an increase over the 180,000 jobs per month that were added for the first seven months of 2013. This increase has reduced the unemployment rate to 7 percent. The added employment should result in more economic growth. When we look behind the numbers, though, things are not so rosy.

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There are about 130 million adults in the labor force. If we assume the population grows at a 2 percent annual rate and the labor-force participation rate stays constant, new entrants into the labor force each year would be 2.6 million, or about 216,000 per month. Adding 204,000 jobs per month will not quite keep pace with population growth.

One reason the unemployment rate has fallen is because some unemployed workers have given up looking for a jobs and are not counted as unemployed. They are discouraged workers. So even if the economy can add more than 200,000 jobs per month, the unemployment rate will not likely fall much further and indeed could increase if those discouraged workers decide to re-enter the job market. Employment numbers are really not so rosy. During the 1982-1984 recovery, the economy added over 400,000 jobs per month. There were even two months where more than 1million jobs were added.

Another reason economists are optimistic is that corporate America has a lot of cash and can easily finance new investments. Standard and Poor’s reports that corporate cash holdings now exceed $1.2 trillion. The problem is that business won’t invest just because it has cash to do so. Business will invest when there is a reasonable probability of earning returns that compensate for the risk. And there is the problem.

The top income tax rate was raised to almost 40 percent, so that after tax cash flows from investments will be reduced. Capital gains tax rates were also increased, which further reduces after-tax income. Add to that the increased cost to hire workers due to the Affordable Care Act, the likelihood that the minimum wage will be increased next year which will cause all labor costs to rise and the uncertainty created by government policy, investments become very risky. That means business may be reluctant to invest, regardless of the amount of cash on hand. While some sectors have seen sufficient increases in demand to compensate for the added risk, most sectors remain cautious.

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Household debt is down from the excessive levels seen just prior to the great recession, and household wealth has increased due to a rise in home prices and gains in the stock market. The problem is that while home prices have risen, they are generally still below their peak value, so the wealth effect is minimized. Although consumer debt has fallen, most consumers still feel reluctant to add new debt, except perhaps in the automobile market. And the increased wealth due to the stock market affects mostly the top income earners and not the majority of consumers.

All of this means that we should be cautiously optimistic about growth in the economy. While we would all like to see the economy grow at a faster pace, it is being held down. Growth occurs when business expands. If we were really serious about growing the economy, the government would do exactly opposite to what they have been doing. Increased regulation slows business growth. The Obama administration continues to add burdensome regulations to key sectors of the economy.

The energy sector, for instance, is growing, but that growth is being slowed by regulation. By building the Keystone pipeline and opening federal lands to exploration, we can grow the economy.  By reducing the tax rate on corporate America, which is now the highest of any industrialized country in the world, we can grow the economy. By removing counter-productive regulations, we can grow the economy. Instead Obama, who doesn’t seem to understand how business works, continues to take actions that are holding back economic growth.

We all hope the economy will grow 3 or 4 percent next year. That would make things brighter and sunnier for Americans, instead of the doom and gloom of the last five years. For now, though, the forecast appears to be more cloudy than bright.

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Michael Busler

Michael Busler, Ph.D. is a public policy analyst and an Associate professor at Richard Stockton College teaching Finance, Financial Institutions, Introduction to Financial Management, Game Theory, Graduate Managerial Economics, Graduate Financial Management. 


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