Morningstar Magazine - February/March 2014 - (Page 22)

Economic Outlook: United States Same Old, Same Old By Robert Johnson GDP, employment, and consumption growth are stuck in a narrow range-and likely to remain so in 2014. Exhibit 1 shows my economic forecast, which includes my estimates for 2013 and 2014, as well as data from 2011 and 2012 for comparison. The table is based on last-period to lastperiod growth rates, or the last period of data for single data points. What is most striking to me about the table is that overall GDP growth rates, employment growth, and consumption data have all been stuck in a very narrow range, centering on 2%, for the past three years. I expect much the same result in 2014. The U.S. economy appears very much like an ocean liner, finding it very difficult to change either speed or direction. My forecast is little changed from my report at the end of the third quarter. I expect little change in the overall GDP growth rate in 2014, but the composition of that growth is likely to be somewhat different. Inventories should be a much smaller contributor to growth, net exports are likely to be a larger subtraction from GDP as imports grow, and government spending should be a much smaller negative next year. Consumption, housing, and business investments (excluding inventories) are likely to change little from their 2013 growth rates. I don't see a big boom or a bust. Others are more bullish on overall GDP growth, but I suspect growth rates in autos will decelerate, existing home sales will likely be 22 Morningstar February/March 2014 flat, and government spending will still be a drag, albeit smaller than the rather large subtraction in 2013. With little change in the 2% GDP growth rate, I suspect employment growth also won't change much in 2014. Slow growth, a wide output gap (a fancy capacity utilization measure), and a bumper farm crop should all keep inflation in check in 2014, although medical costs may rise faster than in 2013, bringing up the overall rate of inflation. With the Fed officially tapering bond purchases, 10-year Treasury bond rates should move up to reflect the inflation rate plus a spread, now that the Fed is withdrawing its support. Auto sales should continue to do well in 2014, with continued employment growth, new models, and an aging fleet. Unfortunately, auto sales are now approaching previous highs, and the law of large numbers is beginning to set in, with year-over-year growth rates likely to slow. I'm still expecting an acceleration in housing starts, as it has taken homebuilders some time to gear up for increased demand (zoning, land acquisition, etc.). However, existing homes will be hard-pressed to grow much given higher rates, more competition from new homes, tight inventories, and lower affordability. My estimates could be too low if the housing market reaccelerates sharply, if the government fiscal drag is less onerous than I believe, or if businesses sharply accelerate spending. The estimates could be too high if inflation accelerates, there is a large geopolitical event, or if the government continues to trim spending too sharply. It's Still a Below-Average Recovery At the four-year-and-one-quarter mark, the economic recovery that began in June 2009 remains one of the slowest recoveries of the post-World War II era (Exhibit 2). Consumption growth, at 1.6%, is less than half of the average annual growth rate of 3.9% at the four-year, one-quarter mark (or at the economic peak, if the recovery didn't make it to the four-year mark). Real disposable income data isn't doing much better this recovery. At least part of the reason for the slowing is continued softness in population growth, which, along with productivity, tends to drive long-term economic growth. Early recoveries were blessed with population growth as high as 1.8%. The current recovery saw only a 0.8% population growth rate in 2009, when the recovery began. Subsequently that population growth rate has dipped even lower to 0.7%, further impeding overall economic growth. The slower population growth rate is due to a more moderate rate of growth

Table of Contents for the Digital Edition of Morningstar Magazine - February/March 2014

Morningstar Magazine - February/March 2014
Letter From the Editor
Preparing for the Next 50 Years
Morningstar Managers of the Year
Fixing the Trust Deficit
Rethinking the Path to Retirement
Same Old, Same Old
Global Briefs
The Economic Implications of an Older World
Banking on Performance
Is the Affordable Care Act Healing Health Care’s Woes?70
Baxter Has a Positive Prognosis
Leading Fidelity’s Charge for RIAs
Our Favorite Mutual Funds
50 Most-Popular Equity ETFs
Undervalued Stocks With Wide Moats
Moving the Goal Post

Morningstar Magazine - February/March 2014