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Rosy Economic Predictions for 2014, With Caveats

Volume 2, Issue 1
January 15, 2014
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rosy-economic-predictions-300x300Many of the economic numbers surfacing during the weeks straddling New Year’s Day have led to optimistic predictions. But you may want to keep a weather eye out for possible trouble ahead.

The Commerce Department said Jan. 10 that U.S. wholesale, durable and nondurable goods inventories rose a modest 0.5% in November to $516.4 billion and the inventory-to-sales ratio remained stable except for durable goods, elevated at 1.57.

During the same month wholesale sales increased by 1% and durable goods orders jumped 3.5%.

The manufacturing sector is optimistic about growth in 2014, an Institute for Supply Management survey found in December. Its Manufacturing Purchasing Managers Index rose to 55.0 last month, surpassing 54.7 in November and an initial December estimate of 54.4. A reading above 50 indicates expansion.

Factory activity in December stayed near a 2½-year high, with a boost in sales of cars and homes, and increasing demand for steel, furniture and other manufactured goods.

ISM says revenues will rise over 16 industries, such as textiles; apparel and leather; plastics and rubber; food and beverages; furniture; electrical equipment and appliances; chemical products; transportation equipment; paper products; computers and electronics; and fabricated metal products.

Expectations for 2014 are overwhelmingly positive, with 69% of survey respondents expect revenues to be greater in 2014 than in 2013. The purchasing and supply executives expect a 4.4% net increase in overall revenues for 2014, compared to a 4.6% increase reported for 2013 over 2012 revenues.

“Manufacturing purchasing and supply executives expect to see continued growth in 2014. They are optimistic about their overall business prospects for the first half of 2014, and are even more optimistic about the second half of 2014,” said Bradley J. Holcomb, chair of the ISM Manufacturing Business Survey Committee.

Those surveyed by ISM predict that capital expenditures will increase by 8% in 2014 over 2013, compared to a 12.3% increase reported for 2013 over 2012. They also forecast that they will increase inventories by 0.9% to support their planned level of sales in 2014.

Missing the Silver Lining

Not all predictions are so positive. In December Grant Thornton’s quarterly survey of 1,700 U.S. CFOS and other finance executives found that 60% of them believe the economy will remain the same or worsen during the next six months. The results followed what had been a slow rise of their confidence in the economy over the course of most of last year.

The booming stock market has helped investors and pension funds, but it also is exhibiting some all-too-familiar hallmarks of the tech bubble of the 1990s and the pre-2008 housing bubble for those of us old enough to remember them.

If the stock market had been infected with “irrational exuberance” before the Great Recession when it was below 14,000, what are we to make of a market that last year set a record number of new record highs in a not-so-great economy, that as of this writing is sitting well above 16,000 – and which values Twitter at $40 billion?

Housing sales had enjoyed increases earlier in 2013, but flattened in November (the most recent numbers available). Home prices, which rose 12% in 2013, are anticipated to grow at a pace of 5 to 5.5% this year, according to the National Association of Realtors.

The Commerce Department also reported that sales of newly built, single-family homes declined 2.1% in November, although sales of new homes were up substantially earlier in the year.

On January 7 the National Association of Home Builders that, based on current permits, prices and employment data, the nationwide average is running at 86% of normal economic and housing activity.

Other concerns include persisting chronic unemployment. The alarmingly high number of Americans who have left the workforce, once brushed under the rug by the news media is now a regular subject of public discussion and is being factored into Federal Reserve Board decisions.

Another cause of concern is the rising cost of health insurance due to Obamacare and its possible dampening effect on consumer spending.

Unmentioned in all of the coverage of the government healthcare website failure and millions seeing their coverage evaporate is that the economy is likely to be impacted by the reduced purchasing power of those who have seen their health insurance premiums skyrocket, whether it is provided by an employer or purchased individually.

For example, with a monthly premium increase of $1,000, an individual’s purchasing power is reduced by $12,000 a year.

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