Up, down, sideways -- what direction will the economy go in 2014?

Jan. 05, 2014 @ 06:19 PM

It’s that time of year again when economists are asked to polish their crystal balls and peek into the economic future.

I certainly understand why. Businesses can make better plans if they can forecast the strength of consumer spending. Knowing the outlook for employment and income will help consumers know if economic belt-tightening or belt-loosening is ahead. And how much government can spend -- or borrow -- is based on the availability of public revenues, and public revenues are largely tied to the relative strength of the economy.

Economic forecasting has a high error rate, especially when the forecasts are for specific numbers like the jobless rate, new jobs created and the change in spending. However, economists are much better at recognizing and predicting general economic trends.

So, let me begin with economic trends for 2014. I -- and most economists -- see several good trends. First, our economy will grow, meaning gains in economic production and income. The better business climate will mean more jobs -- not for everyone who wants a job, but there will be fewer unemployed workers.

The housing market will continue to improve in 2014. The lack of robust home construction and sales activity has been the major factor behind the sluggish economy. People are buying homes again, developers are building homes again and the percentage of homeowners with troubled mortgages is down. I predict 2014 will be the year builders add construction workers – something they’ve not done for several years in North Carolina – and this will be a big boost to the job market.

Inflation should remain mild in 2014 -- averaging around 2 percent -- and interest rates should continue to be affordable. Long-term interest rates, such as those on mortgages, did rise in 2013. The Federal Reserve is expected to reduce its monetary stimulus of the economy in 2014, which normally would mean even higher interest rates. But many experts think the Fed’s actions have been widely anticipated and interest rates won’t move much in 2014.

Now let me provide some specific numeric forecasts. Remember to take these numbers not with a “grain of salt,” but with the entire salt shaker. For the national economy, I see aggregate economic production (“gross domestic product”) expanding by 2.75 percent -- better than in 2013.  I see between 2.5 and 2.8 million net payroll jobs created, pushing the published unemployment rate to between 6 percent and 6.5 percent. Remember however, this most widely quoted jobless rate doesn’t include unemployed workers who have left the labor force or those working part-time because they can’t find full-time work. The rate that includes these folks will remain above 10 percent.

In North Carolina, I predict nearly 100,000 net payroll jobs will be added in 2014 and a year-end published jobless rate of between 6.5 percent and 7 percent. Some regions, such as the Triangle and Asheville, could see unemployment rates near 5 percent by year’s end. However, 70 percent of the jobs created in the state will continue to be in three regions:  Charlotte, the Triangle and the Triad.  

This is a fairly optimistic outlook. But I certainly don’t want to minimize the continuing economic issues we face. Certainly not everyone has benefited from the economic recovery. Average household income -- after adjusting for inflation -- is still lower than it was prior to the recession. There will be improvement in 2014, but many families will still have less than they had seven years ago.

We also face a problem of many unemployed workers not having the skills businesses need for new hires. This is the skill mismatch problem, and economists think it accounts for a large number of the unemployed workers who have dropped out of the labor force. North Carolina may face this problem to a greater extent than other states because of the dramatic loss of manufacturing jobs in recent decades.

The geographical “divide” in economic opportunities has been a long-term issue in North Carolina, and will continue. Metropolitan areas like Charlotte and the Triangle are some of the most dynamic and fastest growing in the nation, and they will continue to rapidly expand. But many small towns and rural areas, which traditionally based their economies on tobacco, textiles and furniture, continue to lag as those industries have downsized, and nothing significant has replaced them.

So the answer to the column’s question (up, down or sideways for the economy in 2014) depends on who you are and where you are, but for more people than in recent years I forecast the answer will be “up.” I have, however, left one frequent question unanswered – what will the stock market do in 2014?  As the late economist Milton Friedman would say, it will fluctuate!

Mike Walden is a William Neal Reynolds Distinguished Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of North Carolina State University’s College of Agriculture and Life Sciences.