Economic Outlook for 2014

In its recently-released publication “Economic Cycle Update”, Investment Advisers Manning & Napier review key drivers of the U.S. Gross Domestic Product to determine whether their prediction for a slow/below trend economic growth rate for the U.S. economy should be adjusted.

The four key indicators reviewed are: consumer spending, corporate investment, government spending and trade. Manning & Napier find both good news and cause for caution in all four sectors.  

1. Consumer spending. In its report, Manning & Napier state: “ . . . consumers played the starring role in the slow growth base case . . . “.  However, the current financial obligations ratio for homeowners is at its lowest level since the early 1990s. Manning & Napier go on to say that the lion’s share of improvement has come from consumer debt reduction.
   Offsetting this positive news is the fact that wage growth tends to be low for most Americans. With debt growth unlikely to fuel consumer spending going forward, income growth is essential for consumption growth to accelerate.
2.  Corporate Investment.  In contrast to the struggles faced by most consumers, U.S. corporations have thrived by putting off investments and hiring as the economy improved. While Manning & Napier report modest improvements in hiring and investment intentions, uncertainty over government-related issues such as the debt ceiling and the Affordable Care Act are expected to prompt a continuation of a conservative attitude for businesses overall.
3. Government.  While October’s struggles regarding the debt ceiling and sequestration heightened public awareness of the government’s role in the economy, Manning & Napier states “we do not see the government sector as a meaningful swing factor in either direction for economic growth”.  Record federal debt is expected to continue to hamper federal spending and tax changes and the expiration of certain programs are predicted to create “a modest drag” on the GDP.

 In conclusion, Manning & Napier’s analysis reports that the improvement in consumer balance sheets, along with signs that business hiring and investment plans may be improving, have the potential to positively contribute to the nation’s economic growth. However, ongoing “slack” in the labor markets and uncertainty regarding government policies point to the likelihood that the economy will remain on a low growth trajectory.

 You can read the entire report by Manning & Napier here.