Later than usual, on New Year’s Day I finally published my predictions for 2014.
2013 ended with a bang. The S&P closed at a record high on New Year’s Eve, the 50th record close for the S&P in 2013. And 3rd quarter GDP was recently revised upward to 4.1% – a healthy figure by any measure. Home prices are rising at an annual rate of 13.6% and, in many regions, have nearly returned to their pre-recession level. Auto sales are at near-record levels. Unemployment, if you can believe the data (which you shouldn’t) has fallen to 7.0%, the lowest level of the Obama presidency.
Economists are forecasting the economy to continue to build on these gains in 2014. Given all of that, it seems a bit reckless for me to take a contrarian view, but I see a far less rosy outlook in the year ahead. The underlying problems that have been eating at our economy for decades and yielded a near-total collapse of our economy a few years ago – a collapse arrested by massive stimulus by both the federal government and especially by the Federal Reserve – have gone completely unaddressed. We are still trying to stoke economic growth by throwing fuel on the fire with more population growth, primarily through immigration, and our laissez faire trade policy is constantly exacerbated by more ill-conceived trade deals, further eroding the manufacturing sector of the economy. History has shown that economic recoveries that are based on gimmicks don’t last – that our economy inevitably slips back into recession when lawmakers and economists grow queasy over our exploding debt.
And that’s what I see happening in 2014. The sudden growth we witnessed in the 3rd quarter of ’13 was a “flash-in-the-pan,” the result of the wealth effect of a soaring stock market and consumers growing weary of austerity, suddenly willing to take on more debt. Neither is sustainable.
The Federal Reserve has already begun to take away the punch bowl, supposedly because the economy is liquored-up enough to keep the party going. I suspect that there are other unspoken reasons, however. The Federal Reserve still likes to pretend that it can operate like a real bank and that, someday, it can sell all of the bonds and mortgage-backed securities back into the economy. When that happens, it’s going to be just as big a drag on the economy as the stimulating effect was when it bought them. The more they buy, the bigger the drag in the future. No one even wants to think about it. So, I don’t see the rally in the stock market continuing much longer.
Nor can consumers continue to pile on the debt, especially when median incomes are actually declining. And they’ll likely decline further as the labor supply grows more out-of-balance with the demand and as our trade deficit continues to erode the manufacturing sector.
Things won’t go completely south in 2014. But the process will begin. The economic recovery will begin to falter by the end of the year once again. Within a couple more years, the Obama presidency will end in recession just as the Bush and Clinton presidencies did before him, when lawmakers grow tired of all of the stimulus used to juice the economy when he first took office.
My 2013 predictions didn’t do so well, thanks mostly, I believe, to an underestimation of the effects of the Federal Reserve’s quantitative easing. Which just goes to show that pumping money into the economy will inevitably stimulate it, and pulling money out (the effect of cutting the deficit and reducing quantitative easing, not to mention the trade deficit) will have the opposite effect. That’s what I see beginning to happen in ’14.
So check out my 2014 predictions. It’ll be fun to see who’s right, me or the so-called experts.