January 06, 2014

Positive Economic Scenarios for 2014

Peter Kennedy
Partner

For a while now, many of us in the scenario-planning business have had a difficult time imagining positive short-term U.S. economic scenarios – like the next 3-5 years. Longer term, it’s not so hard to make the case for healthy, sustainable growth. There are, after all, no shortage of promising technological developments on the horizon (e.g., quantum computing, smart materials, robotics, bio-engineering, etc.) that are expected to eventually start bearing fruit, and that could propel growth and innovation in the U.S. for a long time. 

But what about the next year or two?

The short answer is that the economic outlook at the start of 2014 is markedly brighter than it has been since the onset of the financial crisis. A few very recent data points:

·      Consumer sentiment is up strongly. In December, the Conference Board’s consumer sentiment index climbed to 78.1, from 72.0 in November.  This is the strongest year-end score since 2007.  It certainly doesn’t hurt that the S&P 500 climbed 30 percent last year.

·      Private sector employment continues to grow steadily, if still slowly.

·      Construction spending is at a five-year high according to a Commerce Department study.  The report shows private construction outlays broadly distributed across residential and commercial sectors.

·      The U.S. Congress may be rediscovering bi-partisanship, at least enough to prevent future government shut-downs and uncertainty-provoking fiscal feuds between the two parties. 

So, are happy days (of strong, broad-based and sustained economic growth) around the corner? It’s still hard to make the case for this. For one, the job picture is still too cloudy; new hiring is still relatively sluggish and discretionary income growth is confined to upper-income brackets. In short, there’s a dearth of demand – not like there was in 2008, but still significant enough to act as a drag on employer confidence and on the economy as a whole.

As in all scenario matters, this picture will change over the course of the year. Among the factors to watch out for are destabilizing global events, happening just as the U.S. is winding up its prolonged Afghanistan campaign. There’s Syria and Iran. Or possibly a new euro area crisis, sending shock waves across global financial markets. It’s not hard to generate a long list of credible things that could go very wrong in 2014.

But in the interest of optimism in the New Year, let’s focus on what’s going right and hope for more of the same. We may just be surprised by subtle upside factors gathering strength.

What do YOU think?  We look forward to your thoughts.

Happy New Year.

 

 

Comments  | 

pmarren
One key factor affecting the prospects of the economy is the immense amount of corporate cash that has been sitting on the sidelines waiting for a reason to invest in something other than cash or cash equivalents. Over the past five years, these quantities had been increasing by large amounts; they seem to have reached a peak and finally to be stagnating or even declining. FRED, the St. Louis Fed site, has a chart that seems to show that corporations over the last year or so have finally stopped building cash reserves: http://research.stlouisfed.org/fred2/series/CNCF The reasons for this and the effects of a halt in the buildup in stores of corporate cash on the economy are in some dispute. The notoriously bearish Zero Hedge site is decrying that corporate cash was declining in 2013: http://www.zerohedge.com/news/2013-01-15/golden-age-us-corporations-ending-sp-500-cash-has-peaked-and-now-declining However, it may well be that the halt in buildup of cash means that corporations are finally seeing the opportunity (or necessity) to bust open the mattress and start investing in actual profit-making, human-employing ventures. This interpretation would dovetail nicely with Peter's analysis above, and much of history. Cash is like potential energy, and the monumental amount of cash currently in corporate coffers would appear to be one giant pile of weeping dynamite. All that is needed to set it off is a spark of fear or greed, and we could see a BIG BOOM.

Thoughts?