October 22, 2013
In September, the U.S. economy marked five years since the Lehman Brothers collapse that was a low point of the Great Recession, and it continued working through a long, sluggish recovery. But a government shutdown and looming debt ceiling fight took center stage. Is the economic news good or bad? In a recent interview, Alan Levenson, chief economist for T. Rowe Price, discusses U.S. economic trends and his outlook as we approach 2014.
Fiscal Policy Concerns Return
After making waves this summer by communicating that the Federal Reserve was considering a reduction in the pace of its asset purchases, Fed Chairman Ben Bernanke got a warm reception from markets after his September decision not to taper the quantitative easing program—yet. The Fed seems to be postponing the taper, reflecting lowered U.S. economic growth estimates for 2013 and 2014. However, Levenson anticipates that the summer softening of the economic recovery will not delay tapering too much.
Of more concern to him and Fed policymakers are the consequences of political wrangling over the government shutdown and debt ceiling negotiations. First, restrained government spending under sequestration will likely continue, and second, the arguments are caught up with short-term discretionary spending. Levenson says both trends are harmful because they ignore the much larger problem of long-term entitlement reform.
Housing and Employment Hiccups
The housing recovery took a pause during the summer as interest rates rose, generating less of an increase than anticipated in construction jobs. Sales of existing homes are on an upward trend, but housing starts and sales of new homes have leveled off. Levenson thinks the slowdown won't last, though. He notes that housing starts will need to increase simply to accommodate population growth, and the percentage of median income that represents the median mortgage payment is still historically low, indicating affordability.
On the employment front, Levenson reminds us that the first half of the year was strong and indicators are still healthy. However, in addition to the construction slowdown this summer, the increased government employment that generally accompanies a recovery has been absent this time around. Total labor force participation has dipped to about 63%. Although it is tempting to say that workers have just become discouraged and abandoned their job search, Levenson thinks the numbers reflect other trends. For example, he says, the population is aging, meaning a higher percentage of Americans are retiring. In addition, female labor participation has decreased from its 1990 peak.
U.S. Economic Outlook
Over the first half of the year, the U.S. economy grew at just under a 2% rate, and third-quarter numbers should come in around the same, mainly due to the drag of sequestration cutbacks. The effect of sequestration will lessen over time, and Levenson estimates that fourth-quarter growth will be a bit higher, though the government shutdown will weigh on growth to some degree. He also anticipates that the private sector will pick up momentum, especially in investment areas like housing, business, and fixed investment. For 2014, Levenson projects close to 3% economic growth.
Discussing what could drive those estimates up or down, Levenson says that increased global manufacturing and a slimmed-down trade deficit would boost the economic growth rate above his forecasts. The U.S. has increased its domestic energy production, which should be a factor in reducing the need for imports. Also, there is much less risk of international shocks than there has been in the recent past.
On the other hand, protracted fiscal policy fights would be the largest potential drag on growth, as they inhibit forward-looking behavior by businesses and big-ticket spending by consumers. Another risk is continued stagnation in the mortgage market. Lending standards are still tight and the rental rate is still high, which translates to less economic activity related to home buying.
The views are as of October 3, 2013, and may have changed since that time. This information is provided for informational purposes only and is not intended to reflect a current or past recommendation or investment advice of any kind. Opinions and commentary do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.