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National Yearly Forecast Analysis

Latest Forecast Analysis





February 5, 2014


(All forecasted changes are relative to calendar year 2013)

Real GDP (2.84%)

Real Gross Domestic Product (GDP) is forecasted to grow at an annual rate of 2.84% in 2014, which is slightly above our 30-year average growth rate of 2.7%. Following the below-average growth we experienced in 2013, the production of goods and services in the coming year is projected to expand at its highest rate in nearly a decade.

While the recovery in labor markets has remained sluggish since the end of the 'Great Recession' in June 2009, access to credit and household balance sheets improved considerably in the past year. Nationwide, both the ratio of household debt-to-income and the ratio of all household financial obligations-to-income are near 30 year lows. Household debt levels also rose by 1.1% between the second and third quarters of 2013, which was the first substantial increase since households began deleveraging in 2008. The increase was widespread across major categories of household debt including mortgages, auto loans, credit cards, and student loans. Combined with an improved outlook for the future, we expect consumer spending to accelerate and to be one of the primary drivers of economic growth in the coming year.

Generally, firms remain on solid ground. Fueled by historically low interest rates, commercial and industrial loans recently surpassed their pre-recession levels of 2009 and have helped reinforce business spending over the past two years. Purchases of computer, industrial, and transportation equipment have been particularly strong in recent quarters. Residential construction has also rebounded sharply from the crisis with annual growth rates in excess of 10% in each of the past two years. Although business spending is expected to remain solid in 2014, it should moderate because of changes in Federal Reserve policy.

Little is expected to change in the area of US exports and imports in the coming year. Although China's and Japan's economies are projected to slow, the majority of our principal trading partners are expected to experience slight-to-moderate expansions in growth in 2014. In particular, the sovereign debt crisis appears to have stabilized and much of the European Union, including their four largest economies, is expected to emerge from the stagnation of the last few years.

Finally, the government sector, led primarily by state and local government consumption and investment, is also expected to boost real GDP growth in 2014. State and local government revenues finally surpassed pre-recessions levels in 2013, so this sector should contribute positively toward growth for the first time in years. The recently passed 2014 fiscal year Federal budget provides limited sequester relief that should also provide a minor lift to growth.

Payroll Employment (1.75%)

Employment growth nationally should continue at roughly the same pace we have experienced over the past 3 years. The 1.75% projected growth rate translates into a gain of more than 2.4 million payroll jobs in 2014. At the projected pace, the total number of payroll jobs in 2014 will surpass our pre-recession high of 138 million jobs set in January 2008.

Unemployment Rate (6.3%)

The unemployment rate is expected to decline throughout 2014, with the reductions occurring more rapidly early in the year and slowing in the second half of year. Long-term unemployment and the U6 unemployment rate, which measures individuals who have dropped out of the labor force over the past 12 months and individuals who are employed part-time due to the economy, both continued their improvement that began in late 2012. Long-term unemployment, which is the fraction of unemployed workers who have been unemployed for more than 26 weeks, remains stubbornly high at 37.7 percent. Labor force participation rates have also not rebounded since the end of the recession and continue to fall, indicating the underlying weakness in labor markets.

Consumer Price Index-U (1.64%)

Consumer Price Index Core (1.94%)

Inflation, measured by the Consumer Price Index (CPI) and CPI-Core (which excludes food and energy), is expected to remain at or slightly below the Federal Reserve's target of 2%. Despite the potential risks resulting from the unconventional monetary policy of the past few years, inflation expectations remain firmly grounded. Furthermore, excess capacity in the economy and the continued underutilization of labor will also keep inflation threats low in the coming year.

Three-Month Treasury Bill Rate (Year Avg. 0.15%)

Ten-Year Treasury Note Rate (Year Avg. 3.26%)

30-Year Conventional Mortgage Rate (Year Avg. 4.74%)

Improving economic conditions over the past year have led to the first major shift in Federal Reserve policy in recent years. Starting in January 2014, the Federal Reserve will begin "tapering" or reducing quantitative easing (QE) purchases of mortgage-backed securities and longer-term Treasury securities by $10 billion per month. This should lead to higher middle and longer term interest rates. Therefore, the 10-year Treasury bond rate and the 30-year conventional mortgage rate are expected to increase by 80 and 66 basis points respectively in 2014. Short term interest rates, such as the 3-month Treasury bill rate, should remain much closer to 2013 levels because the federal funds target range of 0 to 0.25% is likely to remain unchanged this year.