- This is the first in a series of financial commentaries by our Editorial Roundtable.
Check back to read alternative points of view expressed in this column.
James Cash Penney, who founded JC Penney in 1902, observed years later that, “Growth is never by mere chance; it is the result of forces working together.” This holds as true for the broader US economy as it does for individual companies. For it is the combination of market forces, government policies and macroeconomic trends that shapes our long-term economic outlook and near-term prospects for growth.
As we peer beyond the horizon to boldly — or foolishly— predict economic developments in 2014, let’s stay mindful of this synergistic process. For only by assessing the interplay of multiple factors can we hope to divine the future.
Here, then, are the key forces and trends MoneyTips predicts will combine to make 2014 a very positive year for the US economy:
- Turning the GDP Growth Corner (at Last!) – The so-called “Great Recession” of late 2007 through mid-2009 was the longest and most severe economic downturn since the Great Depression. But its pernicious impact on our economy lasted far longer — until mid-2013 — as real GDP growth during this six-year period averaged an anemic 1.27%. Fortunately, we now appear to have achieved sustainable growth . In Q3 of 2013 real GDP grew 4.1%, and final Q4 numbers should approach that. According to Mark Zandi, Chief Economist at Moody’s, “We’ve turned the corner. GDP growth in the second half of the year is 4%.” Several factors are driving this improvement, including substantially increased spending by consumers and businesses.
So the US economy is entering 2014 with a full head of steam. As Richard Moody of Regions Finance Corp. put it, the US economy entered the fourth quarter with “…more momentum than had been anticipated. And we expect that momentum to build further in 2014.” MoneyTips agrees wholeheartedly. So we’re forecasting real GDP growth at a robust 3.2% rate for the new year.
- Sustained Job Growth – Over the last five months of 2013, the US economy added an average of nearly 200,000 jobs per month, cutting the unemployment rate to 6.7%, its lowest rate in over five years. Job quality is also rising, as manufacturing and construction job growth reached their highest levels in 18 months. While job growth will likely prove erratic in some months due to weather and other seasonal factors, MoneyTips forecasts a sustained improvement in the overall jobs market, with more than 2 million new jobs to be created in 2014, and the jobless rate dropping to 6.5%.
- Continuing Revival of the US Real Estate Market – Following a multi-year decline, the US housing market in 2013 enjoyed double-digit annual growth rates in both median home price and year-over-year sales. According to Clear Capital, a real estate analytics firm, home prices grew in 225 of the 276 cities they track. Most real estate experts predict continued growth in the US housing market for 2014, but at a slower pace of expansion, due mainly to rising mortgage rates. MoneyTips agrees with these experts, projecting real estate market growth in 2014 to be roughly half that of 2013.
- Improving Trade Outlook – Led by strong demand for US automobiles, aircraft and industrial machines, US exports of goods and services soared to $194.9 billion in November, up 1% from a strong October. This expansion — combined with reduced US demand for foreign oil — drove the US trade deficit to a four-year low of $34.3 billion that month, down from $39.3 billion in October. When December figures are released, the full year drop in our 2013 trade deficit should reach 10%. While further improvement is likely, is this 10% drop repeatable in 2014? MoneyTips thinks not. We remain generally bullish on US exports due to improvement in the European and Japanese economies. However, we think the decline in our trade deficit will be limited to 5% next year due to a slowing of the once-sizzling Chinese economy.
- Continuing, Gradual Rise in Interest Rates – After reaching historic lows in 2012, interest rates rose slightly in 2013. MoneyTips expects this rise to continue in 2014. The December Fed announcement that they will gradually taper their historic bond-buying program is one factor that will contribute to this rise. Another is the acceleration of the US economy, with a third being the upward pressure on housing prices. MoneyTips expects this rise in interest rates to remain gradual, however, as the Fed has announced its intention to maintain the Fed funds rate near zero for the foreseeable future. We forecast a rise in the 10 Year Treasury yield to 3.5% by the end of 2014, up some 60 basis points from today. And 30 year fixed mortgages — now hovering around 4.5% — should rise some 75 basis points to 5.25%.
- Continuing Low Inflation – Although MoneyTips expects 2014 to be a year of solid expansion for the US economy, we don’t expect inflation to rise much until 2015, if then. That’s because price pressures tend to trail economic growth by a year or longer, and fierce global competition should further restrain price increases. So MoneyTips predicts a minimally painful inflation rate for 2014 of less than 2%. The Consumer Price Index, our main gauge of inflation, rose 1.4% in 2013. We think that will nudge up to 1.8% in 2014.
OK, you get the picture. MoneyTips believes 2014 will be the brightest year for the US economy since 2006. But what does this mean to you and your family? And more importantly, how might you adjust your financial decision making to benefit from the positive trends discussed above?
For the sake of brevity, we’ll focus on three investment areas in which you can take action:
- Real Estate – In most parts of the country, real estate prices are on the upswing. A property you purchase today is more likely to appreciate over the next several years than depreciate. That means it’s easier to make money in real estate today than it is to lose it. Plus mortgage rates — while still relatively low — are also rising; which means you’re likely to pay more for a home loan in 6 or 12 months than you will today. All of which suggests that if you are thinking of buying a home, or investing in income property, now is probably a better time to do so than a year from now.
- Stocks – No one can absolutely predict the movement of any financial marketplace, least of all the stock market, which is notoriously volatile. But the fact remains we are now five years into a bull stock market that shows little sign of retreating in 2014. With growth likely to be strong in the general economy, bolstered by higher consumer and business spending, along with low inflation, most experts think the US stock market is a smart place to be in 2014. According to Henry Smith, Chief Investment Officer of Haverford Trust, the party is far from over. “We don’t see a bear market coming,” he said this week. “We believe March 2009 represented a generational low, and that this is the middle of a sustained bull market.” Put simply, you might be well advised to follow Henry’s advice and expand your equities investing in 2014. This is especially true for younger investors years away from retirement.
- Bonds – It doesn’t take a financial genius to see that interest rates are going up. Having reached historic lows in the past few years, there appears to be far more room for interest rates to rise than fall in 2014. As bond investors and brokers well understand, bond prices fall when interest rates rise. Therefore, there is a strong probability that corporate, municipal or Treasury bonds you purchase today will be worth less a year from now. That’s why most experts agree the bond market is likely to be a hazardous place to invest in 2014. Forewarned is forearmed.
As always, MoneyTips suggests that you consult with a trusted financial advisor before making any significant investment. And we urge you to have such a consultation soon, as 2014 is shaping up to be a very exciting year for the US economy.
So good luck, and best wishes from MoneyTips for a healthy and prosperous 2014!