Bank of the West Chief Economist Sees U.S. Consumer Finally Driving Recovery

For the first time in more than six years consumer spending will lead U.S. economic growth as we enter 2014, Bank of the West Chief Economist Scott Anderson, PhD, said during his 2014 Economic Outlook press briefing. Strong exports, capital spending and a recovery in government spending will also contribute to robust 2014 economic growth of 3.0% Q4/Q4.

"We are, at last, leaving the desolation of the Great Recession," Anderson said. "Prospects for the U.S. economy are particularly bright for 2014, as all major sectors of the economy will contribute to U.S. growth.  Job creation is finally accelerating as confidence among businesses large and small has returned, wealth gains are robust, exports are rising and drag from sequestration and Washington in-fighting is set to diminish."

Anderson's 2014 Economic Outlook projects U.S. unemployment to decline steadily through 2014 to 6.6% and potentially create the first challenge for incoming Fed Chairwoman Janet Yellen: how to manage interest rates in the face of a rapidly falling unemployment rate and stronger jobs growth.

"The Fed's unemployment threshold of 6.5% for raising rates will be tested in 2014," Anderson said. "Although strong economic growth might seem like a nice problem to have, Janet Yellen will have to manage the market's interest rate expectations carefully by either strengthening forward guidance, for example lowering the Fed's unemployment threshold to 6.0% early in 2014, or telegraphing a tightening cycle sooner than anticipated on stronger employment and economic growth."

Anderson's Key Sector Growth Observations

The Consumer as Bellwether – With consumer deleveraging in the rear-view mirror and debt-service burdens at record lows, there will be fewer constraints on borrowing and spending.  As 2.6 million new jobs are added and unemployment continues to decline, banks will become more willing to lend to consumers and consumer credit will expand.

Better real income gains will be a result of several factors, including: no payroll tax hike in 2014, steady low inflation and nominal wage gains in a tightening labor market – and, in some cases, wages being bid up for highly skilled workers in short supply.

"As real income gains continue to recover, real income growth at these rates should easily support real consumer spending of 2.6 percent in 2014 – a 30 percent improvement over 2013," said Anderson.

Consumers will also benefit from 2013's strong tailwind in wealth gains. Household wealth is more than fully recovered from the Great Recession and it is estimated that every additional dollar of household wealth will lift consumer spending between three and five cents over the next two years.

Capital Spending Improvement – Taking cues from the consumer, business confidence and small business spending will be on the mend.

U.S. Manufacturing and Export Revival – U.S. exports will see the best growth since 2011, and U.S. manufacturers are performing better than the overall economy. Industrial production growth has been far stronger during this economic expansion than the early 2000's.  The U.S. is also benefiting from higher productivity and lower energy prices, making U.S. manufacturers more globally competitive.  In 2014, the demand for U.S. exports will increasingly originate from Europe, developing Asia and parts of Latin America, rather than the BRIC economies.

Return in Government Spending – The austerity of government spending in recent years is expected to diminish. State and local governments are beginning to spend more as tax revenue improves. Neither another federal government shutdown nor a crisis over the federal debt ceiling is projected to occur in Washington D.C. And there could be a surprising benefit as federal spending constraints are eased.

Housing Market Recovery Remains Intact, with Caveats – The housing market recovery will continue, although housing affordability and rising mortgage rates will remain a headwind in 2014 as the Federal Reserve Board ends quantitative easing.  After a 17.5% gain in 2013, housing starts will rise 12.3% in 2014. Home price appreciation will slow sharply on higher interest rates.  Housing affordability will be a bigger constraint particularly in high-priced markets like those along the coastal regions of California, while marginal buyers will be forced into lower-priced homes.

The Fed Begins to Unwind with January Taper and Strengthens Forward Guidance – The Federal Reserve Board's extraordinary monetary accommodations will begin to end, as it begins to taper its quantitative easing policy in January and ends by Fall, 2014. At the same time, Anderson expects the Fed to strengthen its forward guidance on the Fed funds rate, ensuring that short-term interest rates remain near zero perhaps into 2016.