Here's The Argument That The US Economy Will Be Stronger In 2014

Two weeks ago I wrote:
Comment: Looking for Stronger Economic Growth in 2014

Fiscal austerity probably subtracted 1.5% to 2.0% from GDP growth in 2013, and the foolish government shutdown probably subtracted a little more.

But even with contractionary fiscal policy, it looks like the US economy will grow in the 2% range this year. Ex-austerity (and ex-shutdown), we’d probably be looking at a decent year – maybe this would have been the best year since Clinton was President!

Right now it looks like 2014 will be a better than 2013 for a number of reasons:

1) The housing recovery should continue.

2) Household balance sheets are in much better shape. See: NY Fed: Household Debt declined in Q2 as Deleveraging Continues and Fed: Household Debt Service Ratio near lowest level in 30+ years

3) State and local government austerity is over (in the aggregate) [updated link].

4) There will be less Federal austerity in 2014 (hopefully the sequester cuts will be minimized). And a government shutdown is unlikely.

5) And demographics are favourable going forward.

Here is some more analysis on 2014:

From Goldman Sachs economists Sven Jari Stehn and Kris Dawsey:

Looking beyond Q4, we continue to expect a meaningful acceleration of GDP growth―to 3% in 2014Q1 and 3.5% for the remainder of the year―as the economy moves over the “hump” of fiscal contraction.

From Merrill Lynch economists:

Getting the exact timing of the acceleration in growth is tough, but the case for better growth next year is strong. The economy has healed significantly since the 2008-9 crisis. In particular, the government, households, businesses and banks have gone a long way toward fixing their balance sheets, allowing them to slowly shift their focus from balance sheet repair to expansion.

We expect GDP growth to exceed 3% in the back half of next year as the federal fiscal drag drops from ~1.5pp in 2013 to ~0.5pp in 2014.

Right now it looks like 2014 will be a solid year.

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