2014 Looks Better Than 2013; Northeast Faces Intense Changes
Interview conducted by Rachel Duran
Editor’s Note: This interview was conducted December 12, 2013. For the latest information in regard to the U.S. economic forecast, visit www.conference-board.org.
The economic promise of 2014 says things look better than they did in 2013. However, as with any forecast, there are factors at play in the background that can change the course of best laid plans.
There are a lot of questions in regard to the state of the 2014 economy, many of which won’t be answered until later in the year. One positive was the passage of the federal budget in December, which avoids another government shutdown. A troubling question is: can consumers keep spending more than they make much longer? What does this mean to investments by businesses?
The question marks carry over to the regional level, in this case, the Northeast United States. Can positives in energy sector developments offset declines in the financial services sector, as well as in the traditional pillars of the Northeast’s economy?
Rachel Duran: What are the numbers telling us as we march into the 2014 economy?
Ken Goldstein: This morning the retail sales report showed that consumer spending increased by 0.7 percent in November, and 0.6 percent in October. What is important about those numbers is that wage growth in October and November was 0.2 percent.
For at least the last two months, and actually it has been going on longer, in order to fund consumer spending and in order to buy basic necessities such as food, clothing, transportation and so forth, as well as to replace worn out furniture, appliances and cars, consumers are spending more than they are taking in.
In December we have the holidays, so the question this raises in regard to the start of 2014 is how long can consumers continue to spend not just more, but far more, than they take in? The answer is not much longer.
One prospect is that consumers will go into a post-holiday, winter hibernation. What is critical about this, at least from what I have been able to gather, is some economists are forecasting a good if not better 2014, predicting above 2.5 percent or 3 percent GDP growth.
This is because of sustained improvement in the consumer market, therefore, business will finally invest in new plants, equipment and software.
So, if the consumer indeed goes into winter hibernation than how much do we believe business will spend money on plants, equipment and software?
There is no question in 2014 we will see more GDP growth than in 2013. The question is how much more? Are we going to see just under 2.5 percent or will we see more than 2.5 percent? The answer to the question depends on what the consumer does in the early months of 2014.
It is also heavily dependent on whether or not what we have seen in new job growth is sustained and finally leads to a bit more than 0.2 percent growth in wages per month.
Here is the dilemma. Suppose we see that business continues to hire more because they need extra help to get work done. And in order to get that extra help and motivate their existing workforce, they increase wage growth, which is going to come out of the bottom line.
This is the choice business faced in 2012 and 2013 and it is not going away in 2014; can business afford not to pay more and watch people walk out and get better jobs? Or will they be forced to pay more and in the process see profit margins weaken?
That will not only be predicated on what happens with their spending on equipment but it is also going to affect their stock prices. Something has to give. Either consumers pull back or the stock market pulls back or business can’t afford to invest that much that quickly.
Nationally we have a lot of questions for 2014, but a lot of them, at this stage, do not have any real answers. Not until a few months into 2014.
Duran: So, 2014 will get stronger as the year progresses?
Goldstein: Certainly it looks like this will be a better year than 2013, in part because of what is not happening in the public sector. Let’s break that down into two parts.
With the very modest agreement made this week on the federal budget, it delays if not puts off, any chance for another government activities shutdown until the end of the fiscal year, which is in late September.
The good news is the prospect of going into a shutdown very quickly in 2014 has been taken off the table. Assuming that this agreement passes both the House and the Senate, which I think is likely. [The Senate passed the budget on December 18. President Barack Obama was expected to sign the budget.]
The other side of this coin, while this is going on at the federal level, at the state and local levels, we are coming out of austerity across the country — in California, in Illinois, in New York and New Jersey, and other states as well.
Over the last four years up until early 2013 we were still seeing states and municipalities cutting back in terms of their budgets. That began to change as the economy began to improve a bit in 2013, and the need for budget cuts has lessened in some parts of the country. Detroit being the exception — it is not the only one — but it is certainly the most notable one.
So we have a bit of an offset. We will go into austerity at the federal level although with this budget agreement the sequestration will be less severe. What is going on at the localities is certainly a positive. It has turned from a headwind into a little bit of a tailwind for the overall economy.
Duran: Taking a regional perspective, what is the outlook for the U.S. Northeast’s economy?
Goldstein: For the Northeast we have a big positive, a big negative and a big question mark.
The negative, which has been going on for some time, might be accelerated in 2014 with the introduction and implementation of some of the Dodd-Frank legislation and one of its provisions, the Volcker Rule. [The rule bans banks from proprietary trading.]Even without that we have been staring at and continue to see a consolidation and an absolute shrinking in terms of relative share of the financial sector of the Northeast economy. It is one of the four big pillars of the Northeast’s economy — finance, broadcasting, advertising and publishing.
The new factor, the positive factor, is what is going in northeast Pennsylvania in the energy sector.
In the United States in 2012 and 2013 we found new energy fields, and fields we knew were there but we found the technology to exploit those fields economically. They are in Wyoming, which extends into Colorado and neighboring states. In North Dakota, activity extends across the border. There is also an extension of an oil field in Texas. The fourth is the field in northeast Pennsylvania.
As we continue to exploit these shale oil and natural gas fields, for the Northeast as a whole, we will get a push from the money being made by exploiting these fields.
Is it going to be enough to offset the shrinking in the financial sector? Probably not: because the sector looms so large in the Northeast’s economy.
The swing factor will be international trade. Let’s talk about the global economy. Our forecast for the global economy is for about a 3 percent to 3.2 percent rate of growth for overall GDP in 2014. This is predicated on the pickup in the industrial core of the global economy.
If that pans out it means that the exports and imports of those industrial goods across the globe may very well benefit the ports in New York, Newark, Boston and Philadelphia. The benefits to those economies will offset the loss of jobs and loss of income from the financial sector, which spills over into both the housing market and the leisure and hospitality sector.
If the global economy grows by 3.2 percent, and the U.S. economy grows by 2.6 percent, can the Northeast economy of the United States grow 2.5 percent or more than 2.5 percent? I am suggesting that the answer to that question really depends on three factors: how much the loss is in the financial sector, and the spillover into other sectors such as housing, leisure and hospitality. And how much of that is offset by the exploration of energy sources in Pennsylvania, as well as the pickup in both imports and exports and the financing and insuring of this trade.
There is no question that outside of that we continue to see a decline in broadcasting, which is also centered in the Northeast economy, as well as in terms of ad revenue with the continued switch away from traditional print media into Internet activity, which is less profitable for publishers.
Perhaps the way to summarize this is to say that for the U.S. economy, 2014 may turn out to be a better year than 2013. For the Northeast’s economy, it continues to undergo a fundamental change. The pace of the change may be more intense and faster in 2014 than in 2013.
Ken Goldstein is an economist with The Conference Board, and can be reached by emailing email@example.com. The Conference Board is a global, independent business membership and research association working in the public interest. The board’s unique mission is to provide the world’s leading organizations with the practical knowledge they need to improve their performance and better serve society. The Conference Board is a non-advocacy, not-for-profit entity holding 501(c)(3) tax-exempt status in the United States. Among its services, the organization publishes information and analysis, makes economics-based forecasts and assesses trends. To learn more, visit www.conference-board.org.
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