2014 Economic Forecast: Hold Steady & Hope for More

This economic forecast reveals increased consumer spending and corporate investment may benefit business owners in 2014.

Phillip Perry

Steady as she goes. That old nautical phrase, urging a firm hand on the wheel and an unwavering eye on the compass, seems especially apt for today’s business owners.

The economic waters remain troubled as the nation emerges from a year in which business activity and consumer confidence fell short for the best sales environment. At the same time, an improved economic forecast should guide businesses to greater profitability in 2014.

“The economy is on the verge of stronger growth, more jobs and lower unemployment,” says Sophia Koropeckyj, managing director of industry economics at Moody’s Analytics, a research firm based in West Chester, Pa.

After four years of recovery, she adds, the economy has made big strides. “Business balance sheets are as strong as they have ever been, the banking system is well-capitalized, and households have significantly reduced their debt loads.”

Market Rebound

The more optimistic outlook is reflected by an anticipated rebound in the nation’s Gross Domestic Product (GDP). That figure, the most commonly accepted indicator of economic health, represents the nation’s total annual revenues for all goods and services. The higher the GDP, the more likely consumers will open their wallets wider and businesses will enjoy more robust profits.

So what’s the GDP doing now? In 2014 the nation’s economy is expected to climb at a 3.1 percent rate, according to Moody’s. That’s good news, given that the GDP increase for an economy in average growth mode is 2.5 percent.

“We think things should be looking up considerably next year,” says Scott Hoyt, senior director of consumer economics for Moody’s. “The economy should be significantly better not only than the past 12 months, but also the past several years.”

Maybe it’s expected to increase rapidly, but the 2014 GDP number is being calculated off a pretty low base. Many business owners won’t be surprised to hear that 2013 did not measure up to economists’ expectations. Indeed, when numbers are finally tallied the GDP increase is expected to weigh in at around 1.6 percent for the year, well below the anticipated 2.1 percent rate. What went wrong? “Global weakening, which has led to much weaker growth in exports, and government dysfunction has resulted in weaker-than-expected growth,” says Koropeckyj.

Over the past 12 months the nation was also weighed down by a fiscal drag that is not expected to be as severe in 2014. This drag consisted of the end of the social security tax holiday, the tax increases on upper income households, Obamacare-related tax increases, and a significant reduction in government spending.

“While there will be some fiscal restraint next year as well,” says Hoyt, “we expect it to be reduced to a level that the underlying strength of the economy comes through.”

Consumer Confidence

Consumer sales are a major driver for the economy, and consumer confidence is a major factor in driving those sales. While confidence has been fairly good for the past year, consumers are restrained by a continuing weak employment picture.

“While we do have some job growth, there is continued high unemployment,” says Hoyt. “A lot of people have dropped out of the labor force, and employers have more power to restrain wage growth.”

No rapid relief in that sluggish employment picture is within sight. Moody’s expects the current unemployment rate of 7.3 percent to slowly decline to 6.8 percent by the end of 2014. A “full unemployment” 5.5 percent figure is not expected to be reached until early 2017. Until then wages will be constrained.