The overall outlook for the 2014 economy in the United States is optimistic, but guarded, according to Dr. Lynn Reaser, chief economist at the Fermanian Business & Economic Institute in San Diego, California.
“There are beginning to be indications that we are pulling away from the legacy of the global financial crisis of 2008 and 2009, but we put a question mark there,” she told listeners of the Five Star Radio Mortgage Markets Todayprogram and its host, Louis Amaya, co-founder, CIO, andCOO of the iServe Companies.
The jobs report for November stated that about 200,000 jobs were created, which helped to bring the unemployment rate down to about 7 percent. The December report saw the rate dive even further to 6.7 percent.
“Nevertheless, this has been a pretty soggy recovery,” Reaser said. “Believe it or not, we have been in a technical recovery for four and a half years. A lot of my friends say, ‘If this is a recovery, tell me what a recession is.’”
Dr. Reaser is also chief economist for the Council of Economic Advisors for the California state controller, and is a participating economist in the S&P/Case-Shiller Real Estate Index. From 1999 to 2009, she served as the chief economist for Bank of America’s investment strategies group.
Last year, the country experienced about 2 percent in growth, Reaser noted. “In 2014, we think things will improve somewhat, with growth going up to 2.5 to 3 percent,” she explained.
“On the job front, we expect to see more hiring this year, although companies are still going to be conservative,” Reaser continued. She says it is expected that three million jobs will be added, which should be enough to drive the employment rate down further, perhaps to 6.5 percent by December of 2014.
“The good news is that we’ve seen the deficit shrink significantly in the past year, and it will continue to shrink a bit more in 2014,” according to Reaser. “Another positive factor is that inflation has not skyrocketed and is still a little less than 2 percent despite the fact that the Federal Reserve has been printing money like mad.”
Reaser predicts that by the early part of 2015, this will come to an end and the Fed could be out of the business of buying Treasuries and mortgage-backed securities each month. However, she warns that a result of the Fed’s tapering could be a rise in interest rates for 30-year fixed-rate mortgages to about 5 percent by the end of 2015.
Despite overall positive signs, Reaser says there could be some unforeseen problems that would slow down the economy, including a fiscal gridlock caused by a government shutdown or another debt ceiling standoff.
Another area of risk concerns reducing the federal deficit. “There is no textbook on unwinding a $4 trillion balance sheet. It’s simply never been done,” she explained. “The problem is that it will take time to reduce this large deficit, which could cause a financial backlash. The Fed thinks change should be gradual. Unfortunately, financial markets don’t understand the term ‘gradual.’ They seem to automatically price in the full impact of the change.”
Other possible negative factors include economic turbulence and bankruptcies in various parts of Europe or a natural disaster such as the one in the Philippines.
To prepare for any eventuality, Reaser offers the following recommendations:
– Considering the rising cost of college educations, students might stay home and attend a community college or trade school, thereby avoiding massive student debt, which now exceeds credit card debt.
– For those nearing retirement age, savings should be increased and carefully guarded. The biggest retirement-related mistake is not saving amounts required for retirement or not saving early enough.
– Young people should be encouraged to study math, science, and technology. This is not just for nerds.
– Since most predictions are that housing prices and interest rates will rise before long, if someone intends to stay in a home for a number of years, 2014 may be the year to buy.
– Be careful where you place your investments. Although interest rates are at rock bottom levels, don’t risk investing in questionable companies.
– Diversification is a key strategy. Buy stock with good solid companies in good locations. This will give a good return over time. Don’t take any chances.
– To remain competitive in business, you must invest in technology.
– Stress test your own enterprise. Watch for game changes. Overnight, you can have a success or be totally wiped out. Beware of disruptive technology.
– Listen to your associates, employees, and customers.
In view of the public’s enormous sense of frustration with government and the economy, Reaser cites a study done by author and journalist Carl Cannon about what would make Americans happy again. These factors include:
– Having the love and support of family and friends.
– Working for an organization that has respect nationally and globally.
– Having pride in the work done, whether it’s hi-tech or bagging groceries.
– Working for companies that instill pride in their employees.
“These intrinsic values help to foster happiness, which can be a key driver for economic growth and prosperity for all of us in the year ahead,” according to Dr. Reaser.