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Feb 2014
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Kuehl: Expect More of the Same for American Economy in 2014

Hopes that 2014 will see major improvement on the lackluster 2013 may be a bit optimistic, suggests Chris Kuehl, economic analyst for the Fabricators & Manufacturers Association, International, Rockford, Ill. Kuehl points to four key influencers that will "keep America stumbling but surviving for yet another year"--the Fed and the financial community; the impact of politics; the reactions of the manufacturer and the general business community; and the consumer.

Kuehl says the Federal Reserve is in transition, not only at the top with Janet Yellen replacing Ben Bernake, but three other members of the permanent committee also will be replaced. "In all likelihood, the Fed's major actions will stay as they have been for the bulk of 2014. No interest rate hikes or changes to the reserve ratio are likely. The cautious and slow reduction in the bond buying process is the only real difference that will be observed in 2014," he says.

Kuehl also believes the slow loosening of credit by the banks will continue in 2014, as banks are cautious about the economy in general and grappling with the Bank Reform Act.

For the third straight year, the political issues affecting the economy will be serious enough to cause a real decline in its overall performance, Kuehl says. With control of Congress at stake in this mid-term election year, congressmen and women will have an eye on re-election. Many candidates of both parties are more worried about primary challenges than the general election, and thus will do nothing to alienate their core of supporters.

"This will make deal-making almost impossible as the candidates will be rewarded for their obstinacy and punished for any hint of flexibility," Kuehl says. "Political games will do nothing to help the economy grow and may actually do some real damage, perhaps dragging the GDP growth rate down by half a point over the course of the year."

On the business side, the news through the last few months of 2013 was actually pretty upbeat, Kuehl says. The year-end data on industrial production, capacity utilization and productivity were respectable, and the data from surveys like the Purchasing Managers Index, Credit Managers' Index, and the various offerings of The Conference Board all trended in a positive direction, leaving the impression that business was building some momentum going into the New Year. But, he cautions, much of the positive data in late 2013 was due to a fairly dramatic inventory build late in the year.

Other conditions that bode well for manufacturing production are in place, he adds. Accessibility of credit has improved, and there is more export demand than ever, from a variety of sources. Costs of raw materials are still generally down and labor costs are still low despite the fact that many companies are desperate for the right skilled worker. It is unlikely to stay that way for long, however.

"By the middle of 2014, costs will likely be rising across the board. The producers of metal and other raw materials have been reducing production to bring supply in line with demand. Wages will rise for the people needed as they will be in short supply, and any pickup in business will make them that much more valuable. The bottom line is that business has maybe six more months of favorable conditions before the prices start to adjust and rise," he says.

Three factors typically make the consumer feel ready to start spending again, Kuehl argues. The consumer traditionally responds to rising housing prices, which make them feel more financially secure. They respond to improved jobless rates, which reassure them their joy may last. And they respond positively to falling gasoline prices. All three are trending in a positive direction, yet the consumer is not acting very motivated, he says.

"It appears that consumers have become deeply skeptical about the potential for real recovery," Kuehl says. "If that attitude persists, the first quarter will be weak, and a big rebound in attitude is unlikely for the course of the year. This will lead to anemic growth of between 2.5 percent and 3.0 percent."

[Dr. Chris Kuehl is economic analyst for the Fabricators & Manufacturers Association, International, and managing partner of Armada Corporate Intelligence. He is the author of Fabrinomics, a biweekly economic analysis e-newsletter for members of the FMA. For more information, go to fmanet.org/fabrinomics.]
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