U.S. Economy Still Plodding Along, But 2014 Will Be Strong

There are still a few more weeks before the end of September, but the end of the third quarter is now in sight. And barring any dramatic change in the economic landscape (the situation in the Middle East is presently causing the most uncertainty), it is clear from the data that has been reported for the third quarter that the U.S. economy continues to grow at the same tepid pace that has prevailed since the Great Recession ended four years ago. Real GDP is expanding at 2% per year, and the labor market is creating about 175,000 new jobs every month.

By now everybody knows that this pace of growth is far from satisfactory, but there seems to be little that anybody can do about it. U.S. businesses are still reticent to invest in new equipment or hire new workers. They know they cannot continue to grow profits by cutting costs, but neither can they justify an increase in investment at the present time with rational expectations of future increases in demand.

On the other side of the balance, consumers have generated up a large amount of pent-up demand for many types of goods, but household income growth is stagnant and there are few, if any, indications that this will change anytime soon. Consumers are spending money for big-ticket items that they need to replace, but they have cut back on discretionary spending in other areas in order to afford such expenditures. Their lack of confidence about future economic conditions is restraining their desires to increase their spending activity.

Looking forward, I expect that the economic growth in the fourth quarter of this year will be a bit stronger than 2%, and the employment data will gradually start to improve. The pace of growth in Q4 will not be strong enough to lift the annual total for 2013 any higher than 2% for the year, but it will put the economy on a trajectory that will push growth to greater than 3% in 2014.

Corporate profits are at all-time highs and so is the stock market. The recovery in the residential construction sector continues to gather steam. This will push house prices and consumer confidence levels higher. These are the ingredients of a faster recovery. We are very near the point where the bad memories of the Great Recession will be increasingly replaced by the entrepreneurial spirit that is the cornerstone of the American economy.

Uncertainty will still abound, and there is plenty of downside risk to my forecast. The turmoil in Syria and Egypt and other countries in the Middle East will not be resolved in the near-term. On the domestic side, Congress will no doubt take the debt ceiling issue to the brink, and the implementation of Obamacare will likely be messy. The unwinding of the Federal Reserve Board’s program of quantitative easing will probably push interest rates a bit higher.

But as of right now, I am optimistic that the good will outweigh the bad; and, therefore the economic recovery will accelerate.