Greater Charlotte Biz was delighted to host John Silvia, Wells Fargo Securities chief economist, at our Fall Biz Symposium. We asked John to address a number of possible disruptions to the economy in 2014 and suggest how they might affect businesses during the coming year.
John spoke of the nomination of Janet Yellen as the new Chair of the Federal Reserve in January 2014. He commented that she is likely to keep the same or similar policy path as Chairman Bernanke. While she is viewed as slightly more dovish than Bernanke, she is expected to keep rates short through 2015. She is not expected to disrupt the financial picture dramatically.
The first and primary challenge of the New Year will come early when the House and Senate have established a new deadline for action on the federal budget, deficit reduction and on long-term debt. A joint committee formed with members of both houses has been charged with seeking an accord by December 13 on taxes and spending before another shutdown of the federal government. Unfortunately, everything in the budget is formed by a special interest and reaching a successful compromise will not be easy. The U.S. borrowing authority has been extended to at least February 7, although the actual hard deadline is likely to be closer to March of 2014.
Silvia explained that we have experienced a sustained recovery in 2013, but still below an historical experience with a benchmark of 2.75 percent trend from 1982 to 2012. He commented that long rates had risen to a point where the 10-year yield was at nearly 3 percent, but would return downward to about 2.5 percent. He said that there would likely be no tapering from the Fed until at least March of 2014. He also projected that rising rates are not expected to threaten the housing market recovery and that housing would be a strong point in our economic recovery breaching the 1 million-unit mark in 2014 and 2015.
Uppermost of concern to Silvia are the federal government long-term entitlements including Social Security, Medicare and Medicaid. He projects that mandatory outlays will nearly double in the next 10 years. He commented that the disability program is expected to run a cash shortage in just three years and that health care will seriously burden our budgets very quickly.
In terms of national security, John remarked that concerns in Syria, Iran and North Korea have resulted in a flight to safety for government bonds with yields down to nearly 4 percent.
Silvia does not expect that the brinksmanship of the political parties will change despite mid-term elections, but slight adjustments will be made to the makeup of the House and the Senate. Currently those elections are expected to be a toss-up—meaning the risk of partisanship will continue going forward.
What we can all hope for is a productive government that will foster greater economic growth in the near term. At the same time, confusion over the Affordable Care Act is causing businesses to be overly cautious until they can be more confident about the access and costs of this new system.
One of the biggest worries for the U.S. economy is the declining workforce. Looking at the change in its composition, we see that less and less young people are part of the labor force as older people are having to work later into life. Both male and female youth as well as adult females have been leaving the labor force since the recession and not returning.
What was most encouraging to Silvia was his forecast. He expects that growth will pick up, hitting 2.5 percent in the second half of 2014. Business fixed investment and personal consumption are expected to increase steadily and the housing market will be strong.
In summary, Silvia contends that the recovery continues and even picks up steam unless or until our public policy makers stall and disrupt our economy from its recovery.
And from Greater Charlotte Biz, we wish you the very best of holidays and an incredibly prosperous 2014!