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Peter Crabb: Why my glass for the 2014 economy is half empty

Peter R. Crabb
Peter R. Crabb

Is that glass in front of you half-full or half-empty? The answer will determine your outlook for the economy in 2014.

For those of you with half-full optimism, there are number of economic indicators you can point to for support. First, the pace of national economic growth picked up in the second half of 2013. U.S. real gross domestic product for the third quarter of last year increased at annualized rate of 4.1 percent.

Second, the Federal Reserve is cutting back on its extraordinary measures for stimulating the economy, which suggests economic conditions are improving. After their last meeting in December, policy makers said “economic activity is expanding at a moderate pace” and “labor market conditions have shown further improvement.”

Third, consumers appear willing to spend, and their confidence is improving. The U.S. Department of Commerce reports that the personal consumption expenditures are about 3.5 percent higher than last year. The Conference Board reported that its consumer confidence index increased in December to 78.1 from 72 in November, and that consumers’ sentiment regarding current conditions is at a 5-year high.

For those of you with a half-empty glass, there are an equal number of economic indicators supporting your more pessimistic outlook. First, at 7 percent, the national unemployment rate is still as high as it was during the 1991 recession. The unemployment rate needs to fall another 2 full points, the equivalent of another 3 million new jobs, before conditions return to what many economists consider normal.

Second, the Federal Reserve is still keeping short-term interest rates near zero and buying $75 billion in long-term debt every month. Such actions help support stock market prices as investors seek higher rates of return, but this financial repression crowds out real business investment, which is the source of long-term economic growth and job gains.

The stock market ended the year with its largest annual gain since 1997. The gains in prices were not, however, driven by large gains in corporate earnings. The price-to-earnings ratio on the Dow rose from 14.5 to 17.

Third, consumer spending is holding up but real wage gains are small or nonexistent. The U.S. Department of Labor reports that the average worker in the private sector today earns about $24 per hour. While this is 2 percent higher than the year before, inflation is 1.2 percent higher. Workers are seeing only small gains in real income.

The same half-full or half-empty look can be found here in Idaho. Over the last two years, Idaho’s unemployment rate has fallen almost 2 full percentage points, but most of this drop is due to people leaving the workforce. At the end of 2013 our state has the same number of nonfarm workers as we did at the end 2006.

So pick your glass and your outlook. Are things looking better for the economy or still poor?

I want to be an optimist and still have much to be grateful for, but prospects at both the national and state level are not particularly favorable. Without some improvement in business conditions for investment and capital spending, the economy will grow only slowly and gains in the financial markets will be short-lived.

I would sure like to see my half-empty glass fill up.

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