The U.S. and World Economy in 2013

December 31, 2013 02:39 AM

via a special arrangement with Informa Economics, Inc.

A look back, and a look ahead

NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.

I asked my Informa cohorts Bruce Scherr (Chairman of the Board/Chief Executive Officer) and Roger Bernard to give me a look back at 2013 relative to the U.S. economy, with some comments on China and the EU. Here is what they provided...

What a year that has gone before us in economic terms. We opened with an unemployment rate still above 8 percent, with a non-traditional set of policies by the U.S. Federal Reserve in place, and a dysfunctional Washington that showed how fiscal policy can impact the U.S. economy.

The Fed’s quantitative easing (QE) efforts saw them soaking up $85 billion per month in bonds in an effort to lower long-term interest rates and foster U.S. economic growth. Their efforts were criticized by some but did appear to be bringing some stability to the marketplace and kept the U.S. housing sector moving forward.

The Fed also became more open, talking about how long interest rates were going to stay low. That marked a major shift for the U.S. central bank whose policy moves had long been shrouded in mystery at times.

Taper caper. As the U.S. economy began to pick up some mild steam, the questions on when the Fed would start backing away from their QE efforts arose. And when Fed Chairman Ben Bernanke in June started talking about that prospect, markets stumbled as they feared the loss of this crutch they had been leaning on during the sluggish economic recovery.

Almost immediately after the market swoon, Fed officials spoke with a near unified voice to underscore that things were not about to end in terms of the QE efforts and especially that interest rates were not about to rise.

Taking a page from the U.S. Fed’s playbook, the European Central Bank also started to talk forward guidance on interest rates. That was a major departure for them as they struggled to try and convince those in the euro zone that things were going to stay positive from a monetary policy standpoint for an extended period.

China’s economic growth continued to be married to demand from foreign countries, and with the U.S. and European economies still struggling, Chinese leaders shifted their focus to spurring domestic demand. Their economic performance "fell" to near 7.5 percent as the year unfolded, a level which generated a lot of concern and spurred reassuring commentary from Chinese leaders.

Meanwhile, back at the U.S. ranch, the commentary from the Fed wasn’t enough to keep the housing market from stumbling as mortgage rates had risen and choked off the gains which had become a solid flooring under the market. By the time those were worked through the system and mortgage rates moved back down, the focus shifted to the fiscal follies in Washington.

Lawmakers argued and argued over budget and spending issues, leading the partial government shutdown that lasted from Oct. 1 through 16. It did nick the U.S. economy in the fourth quarter, but the biggest immediate impact was a loss of data. Or at least a delay in government economic data which took months to finally get "caught up" and back to a normal release schedule.

Traders also kept betting ahead of each Fed meeting, or nearly every Fed meeting, that the time was now for the Fed to start pulling back on the QE efforts. And when they didn’t, markets breathed a collectively sigh of relief and headed higher.

As the year drew to a close, the Fed focus continued and as Fed Chairman Bernanke emerged from the final FOMC meeting of 2013, the Fed had finally set the pathway forward for tapering their asset purchases. Instead of markets greeting that with a woe-is-us response to the Fed pulling this massive liquidity infusion back, they rose. Smartly. The reason? Markets finally had shifted from the mindset of thinking the Fed’s easy money policy was the only thing keeping markets afloat to a realization that the U.S. economy was indeed gaining enough strength to start spending a few hours without that massive crutch.

What have we learned from this year? The Fed’s stimulus efforts did help at least the U.S. stock market, setting up most indices for their best showing since the mid-1990s. It took the wind out of the sails of gold futures, with the precious metal losing its luster in a big way as markets realized the safe-haven metal was no longer going to be in vogue as economic performance started picking up steam.

Fiscal policy does indeed matter. But getting action on fiscal policy is another matter completely, especially with the divisive nature of the current makeup in the U.S. Congress. And lawmakers should now know that a partial government shutdown is not the way to run a railroad or most importantly, an economy.

We learned that the unemployment rate can come down even though job growth was not taking place at the level one would have expected with the upturn out of a major economic hole. Folks leaving the job market altogether helped to bring the jobless rate down. Now what will be key is if the economic performance in this country moves ahead at a pace to actually create more jobs than expected. And if that happens, it could make for some interesting jobs data in the months ahead.

But the biggest lesson we learned is that while the U.S. consumer still was wary, they would open their wallets and spend. It happened in spurts, but it did still happen. And that consumer continues to loom large as the catalyst for the U.S. economy, making up some 70 percent of our economic activity. The U.S. economy is poised to spurt ahead. Now we just need all the parts and pieces to stay on track long enough to make that a reality as opposed to just a prediction.

NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.






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