This time, it's for real. Economists say 2014 could bring the comeback we've all been waiting for.
They also said this in 2013. And 2012. And 2011. Those times, bullish sentiment succumbed to aggravated disappointment and a concession that, yes, the dismal scientists were wrong again. Now, though, some evidence actually backs them up, starting with across-the-board strengthening in the data and a better-than-before potential for Congress to avoid fiscal shenanigans for an entire year. An entire year!
Signs of a turnaround started to appear at the end of 2013. The November jobs report was solid and stronger than expected—unemployment dropped to 7 percent, down from a crisis peak of 10 percent, and payrolls swelled by 203,000. Then came GDP, which pegged third-quarter growth at a surprisingly respectable 4.1 percent. It was far better than the 2.5 percent growth in gross domestic product that the economy recorded in the second quarter. The Federal Reserve Board felt so good about the incoming data that it told Wall Street the central bank would begin taking its foot off the gas, easing back on stimulus measures.
A word, before we proceed, about the December jobs report, which the Bureau of Labor Statistics released Friday morning: It's a head-scratcher. On one hand, the unemployment rate dropped to 6.7 percent, the lowest level since October 2008. On the other, payroll growth—for which there is a margin of error of plus-or-minus 100,000—was much lower than expected, the economy adding just 74,000 jobs, compared with forecasts of roughly 200,000. More people left the labor force, and that's part of the reason the unemployment rate, which is measured based on people looking for work, declined. But the previous two months' payroll numbers were revised up by 38,000. The report was not a heartening way to start 2014, but it's not quite clear yet what it means. Paul Ashworth, chief U.S. economist at Capital Economics, wrote in an emailed note to clients that the payroll miss was probably largely due to "unseasonably severe winter weather" last month. Joe LaVorgna, the chief U.S. economist at Deutsche Bank, called the news "bizarre."
"It is such a inconsistent report in the sense that you've got the drop in the unemployment rate along with a weaker employment number," he said. "The two almost offset each other."
And despite one bad report, the fiscal news from December was good and offers hope for the rest of the year. Lawmakers passed a two-year budget deal, small though it was, that marked a significant departure from the let's-make-decisions-only-after-freaking-everyone-out approach Congress has deployed relentlessly since the debt-ceiling debacle of 2011. Then, the brinkmanship drove markets and confidence off a cliff and stripped America of its gold-plated credit rating. In 2013, the fiscal cliff and sequester did enough damage to slice 1.5 percentage points off GDP growth, and the October government shutdown may have knocked half a percentage point from the fourth-quarter's growth. (Those initially bullish economists blamed all of this stuff for their erroneous recovery predictions.)
In 2014, however, economists are calculating that stability in the data and a campaign-focused, risk-averse Congress will yield the sustained recovery the country's been so-far denied. "That initial phase after [the] financial crisis is reparation, and then we can start recovery," says Morgan Stanley economist Ellen Zentner. "I think that five years after the financial crisis, that's where we are"—starting a "real" recovery.
Of course, all positive economic vibes come with caveats about unforeseen circumstances such as European sovereign-debt crises, Arab Springs, and tsunamis. And don't forget about the debt ceiling, which lawmakers will have to grapple with eventually in 2014.
But the real potential for bad news lies in what we already know: Despite slow improvement in the economy and a possibility the recovery will proceed at a faster clip in the next 12 months, the nation has a long way to go before things are normal again, particularly for the long-term unemployed and others. Labor-force participation rates have continued their decline in recent months, as well.
The belief in the reality of recovery doesn't just matter as a thought exercise. "If people don't feel very good about their future finances, they tend not to spend," Zentner says. "Consumer spending has been subpar, and that's why the entire recovery has been subpar." Measures of consumer sentiment were up in December—a good sign, but one that will need to be maintained.
How policymakers understand and talk about the recovery, then, matters. (See Jim Oliphant on "Why Obama Is Afraid to Tout the Economy".) Describing it as real and strengthening could inspire confidence in consumers, an undeniably good thing. But it could also remove the impetus for taking further actions to shore up the recovery or help those affected by the financial crisis. Chad Stone, the chief economist at the Center on Budget and Policy Priorities, worries that a better-than-expected 2014—while a good thing—might take pressure off economic policymakers, who he believes can do more to help workers get back on their feet by extending federal jobless benefits.
"We can be complacent about the direction the economy is going if growth picks up and employment picks up in 2014, but we have to, as I guess the British say, 'mind the gap'—that there still is this gap between what we would be capable of producing with stronger demand," Stone says.
Hopes are already high for this month's economic reports: Early signs point to GDP busting past expectations again for the fourth quarter. That, plus the jobs reports, will offer an early read on whether economists are right this time around or whether 2014 proves to be just another year of missed expectations. Initial signals are pointing to the former, and that's good news for everyone.
This article appears in the January 11, 2014 edition of National Journal Magazine as Inflection Point.
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