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Economic Forecast 2014

Executive Newsletter — February 2014

Bob Morgan
Robert J. Morgan,
Senior Consultant,
Austin Associates, LLC

Bob Morgan, Economist with Austin Associates, LLC

“2014 is a pivotal year for the US economy,” states economist Bob Morgan with Austin Associates. Mr. Morgan works with Citizens National Bank on an ongoing basis to advise the bank of economic trends and considerations moving forward. He recently shared his opinion about how he sees the economy shaping up this year.

Compared historically, the recent recession cycle was similar to that of 1980-1982. What happened after those recessions, however, has been very different. In the 1980’s there was a huge spike in personal consumption expenditures (PCE), 4.6% in 1983 and 7.3% in 1984. This was an inflationary cycle that led to growth in our economy. People were spending money. Unlike that period, the years coming out of this recent recession have seen minimal increases in PCE, 2.5% in 2011 and 2.2% in 2012, and a continuation of deleveraging by consumers in an effort to pay down debt. According to Morgan, “Seventy-percent of our nation’s gross domestic product (GDP) is based upon PCE which explains our very weak economic recovery.” Factors that limit PCE include: labor market uncertainty, low wage and income growth, political deadlock, lack of a long-term fiscal policy by our government and fear of increasing healthcare costs due to the health care law. “The biggest factor which is affecting the slowdown in PCE, however, is our nation’s demographics and that is a fundamental difference between now and the 1980’s,” states Morgan. Baby boomers are the fastest growing population segment and their spending habits are very different than those of younger generations. They spend less on housing and lifestyle expenses which traditionally have been big boons for an economic recovery.

For these reasons, Morgan feels the US will not see a rapid rate of growth that will stimulate the economy any time soon. He predicts a GDP growth rate of 2-2½% through the second quarter and 3-3½% by the end of the year. Deleveraging will continue at a reduced level and job growth will average less than 200,000 per month. “Much of this is due to increased efficiencies in manufacturing processes and the need for a higher skilled labor force than in the past,” Morgan explains. The unemployment rate has already dropped to around 7% and he predicts inflation will remain below 2% for the year. He doesn’t foresee interest rates changing well into 2014, maybe even longer.

Bright spots in the economy do exist, specifically in the auto industry and housing sectors. The average age of a car in the US is still 10.7 years old, so there will continue to be demand for new vehicles for the next 2 or 3 years Morgan feels. Housing also will see increased demand as the inventory of homes is currently less than 5 months’ need at current sales levels. New home construction will be needed.

“Of course much of the economy is dependent upon what the government will do about the debt ceiling, a federal budget moving forward and what the Federal Reserve’s monetary policy will be,” Morgan comments. The next few years’ economic questions will be answered by what is decided in 2014.

To view Bob’s entire presentation, click here.