The beginning of the year is a traditional time to look forward to potential economic developments. Although forecasts can change due to unforeseen circumstances, the outlook for 2014 is generally positive, with a return to solid growth and the possibility of even stronger economic performance, depending on several key factors that should become clearer over the next few months.
GDP, Unemployment, and Inflation
As of late December 2013, year-over-year growth of real gross domestic product (GDP) was expected to range from 1.7% to 2.3%, higher than was expected earlier in the year but lower than the 2.8% rate in 2012. The economy is projected to bounce back in 2014, with growth of around 2.7% to 3.2%, near the 50-year average of 3.06%.1–3
Unemployment, a drag on the economy throughout the recovery, has begun to show improvement, dropping to a five-year low of 7.0% in November 2013.4 This trend is expected to continue, with unemployment averaging 6.3% to 6.7% in 2014 before dropping further in 2015 and 2016.5–6 More Americans with jobs could stimulate consumer spending, which represents almost 70% of GDP.7
Annual inflation was projected to be a relatively low 1.1% to 1.2% in 2013. The Federal Reserve expects the rate to rise slightly to around 1.4% to 1.6% in 2014, still short of the Fed’s 2% target rate for optimal growth.8 Although consumers may prefer no inflation at all, a moderate increase may bode well for the economy.
Federal Government Issues
The federal government caused some short-term economic damage in 2013 by raising taxes in January, allowing across-the-board sequestration cuts in March, and shutting down the government in October.9 Although the economy seems to have weathered the tax increases and budget cuts, the shutdown may have reduced fourth-quarter GDP growth by as much as 0.6%.10
The good news for 2014 is that the bipartisan budget bill (passed on December 18) replaces some sequestration cuts with more targeted reductions, and approves spending limits for 2014 and 2015, thereby reducing the likelihood of another shutdown.11 A battle over the debt ceiling could still develop in February, but if that can be resolved without further damage, a more functional federal government may help stimulate economic growth.12
To stimulate the economy, the Federal Reserve has held short-term interest rates near zero for the last five years and increased the monetary supply through bond-buying programs called quantitative easing (QE). In a December 18 announcement, the Fed clarified its intention to maintain low short-term rates for the foreseeable future while beginning to taper its QE program in January 2014, reducing bond buying from $85 billion per month to $75 billion. This was only a first step, but the Fed indicated that further tapering should be expected if the economy continues to improve.13
Tapering had been widely anticipated by nervous investors, who feared negative consequences if the Fed turned off the financial faucet.14 However, the incremental approach — combined with clear communication and the assurance of low short-term rates — sent the stock market to new highs.15
Some analysts believe that ending the stimulus may be good for the market in the long term by reducing dependence on easy money and allowing share values to settle at more realistic levels.16
Initial response from the bond market was muted, with a slight drop in prices and a corresponding increase in yields. However, continued tapering could lead to higher long-term interest rates. This might benefit investors (including retirees) looking for returns on fixed-income assets, but it may increase interest rates on credit cards, auto loans, mortgages, and private student loans.17
Potential Business Expansion
A key issue for 2014 is whether U.S. businesses will increase investment. Corporate after-tax profits for the third quarter of 2013 rose to a record 11.1% of GDP, almost double the 6.1% average since 1929. However, businesses have been slow to expand due to reduced consumer demand and an uncertain economy. The improved unemployment picture suggests this may be changing. In a stronger economy, corporations may have to invest or lose market share. If corporate America does loosen the purse strings, more jobs could be created that will drive economic growth.18
Although it’s important to keep an eye on economic news, your investment strategy should be based on your overall objectives, time frame, and risk tolerance.
The principal value of all investments may fluctuate with market conditions. Stocks, when sold, and bonds redeemed prior to maturity may be worth more or less than their original cost. Investments seeking to achieve higher yields also involve a higher degree of risk.
1, 5, 8, 13) Federal Reserve, 2013
2, 6, 9, 12) University of Michigan, 2013
3, 7) U.S. Bureau of Economic Analysis, 2013
4) U.S. Bureau of Labor Statistics, 2013
10) Standard & Poor’s, October 16, 2013
11) CNN.com, December 18, 2013
14, 16) CNNMoney, December 17, 2013
15) usatoday.com, December 18, 2013
17) MarketWatch, December 18, 2013
18) The Wall Street Journal, December 15, 2013
INVESTING RISK DISCLOSURE
Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money. Before investing, consider the funds’ investment objectives, risks, charges, and expenses. Contact Mahoney Asset Management for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.
IMPORTANT CONSUMER INFORMATION
This web site has been prepared solely for informational purposes. It is not an offer to buy or sell any security; nor is it a solicitation of an offer to buy or sell any security.This site and the opinions and information therein are based on sources which we believe to be dependable, but we can not guarantee the accuracy of such information.
Representatives of a broker-dealer or investment adviser may only conduct business in a state if the representatives and the broker-dealer or investment adviser they represent: (a) satisfy the qualification requirements of, and are approved to do business by, the state; or (b) are excluded or exempted from the state’s licenser requirements.
An investor may obtain information concerning a broker-dealer, an investment advisor, or a representative of a broker-dealer or an investment advisor, including their licenser status and disciplinary history, by contacting the investor’s state securities law administrator.
SECURITIES: ARE NOT FDIC-INSURED/ARE NOT BANK-GUARANTEED/MAY LOSE VALUE
This information is intended for use only by residents of CA, CT, DC, FL,, MA, MD, MN, NC, NJ, NY, OH, PA, and VA. Securities-related services may not be provided to individuals residing in any state not listed above.
The financial calculator results shown represent analysis and estimates based on the assumptions you have provided, but they do not reflect all relevant elements of your personal situation. The actual effects of your financial decisions may vary significantly from these estimates–so these estimates should not be regarded as predictions, advice, or recommendations. Mahoney Asset Managment does not provide legal or tax advice. Be sure to consult with your own tax and legal advisors before taking any action that would have tax consequences.
Securities offered through
Newbridge Securities Corporation,
member FINRA / SIPC
Investment Advisory Services offered through
Newbridge Financial Services Group Inc.,
an SEC Registered Investment Adviser.
Office of Supervisory Jurisdiction
1200 North Federal Highway, Suite 400
Boca Raton, FL 33432