CHICAGO—The coming of the New Year brings not just resolutions, but new rounds of economic predictions. And yesterday, CoreNet Chicago brought in economists from the Federal Reserve Bank of Chicago for lunch at Maggiano’s Banquets and an opportunity to share with commercial real estate providers their forecast for 2014.
William A. Strauss, a senior economist at the Fed, began by reviewing its predictions from last year, and concluded they were “fairly accurate,” since the worst consequences that others feared would result from sequestration, a possible government default or a shutdown did not occur and inflation remained a non-issue.
Instead, economic growth remained around 2%, a steady if somewhat modest rate. Strauss also noted that other observers have gotten a bit excited by some increased purchasing activity in the latter half of the year. He remains unconvinced that this statistical bump will have long-term impact since much of it was attributed to corporations replenishing their inventory. Overall, “growth has continued around the low end of trend.”
“We’re still very far from thinking this is a normal situation,” he added, meaning a pace of recovery historically seen during typical economic recoveries. For example, in the aftermath of the 1981 recession, growth rates hit about 5.0%, and after the oil crisis and 1974 recession, the economy achieved a 4.7% rate of growth.
One of the factors holding the economy back is the relatively slow pace of new housing starts. Although housing has gotten out of the deep trough of 2009, Strauss noted that Blue Chip Economic Indicators, which annually polls about 50 top business economists, has predicted about 1.1 million housing starts. “That is well below what we think of as a normal rate.” Strauss would not predict a complete recovery until the economy begins generating about 1.5 million starts.
Still, most forecasters, including those at the Fed, remain fairly optimistic about the coming year. Strauss said the Blue Chip forecasters predicted a 2.8% growth rate in 2014. That would be “the fastest growth we’ve seen in four years.” And the Federal Open Market Committee is even more optimistic, currently predicting a growth rate between 2.8% and 3.2%. But he remains unconvinced that pent-up demand will bring about the 4.0% to 5.0% growth rates the US needs. FOMC predicts growth rates between 3.0% and 3.4% in 2015, before falling as low as 2.5% in 2016. “The Fed is in essence saying that 3.0% is as good as it gets.”
The recession wiped out about 8.7 million jobs, he added, and in the years since the US has added about 7.4 million, including about 2.3 million this year. And at some point during 2014, most likely in spring or summer, the economy will hit 8.7 million jobs created since the end of the recession. Strauss predicted this will set off celebrations to mark the milestone.
“I’m not going to celebrate,” he said. “I’m going to pour myself a stiff drink and drown my sorrows.” The problem is that the economy, to keep up with a growing population, should have generated millions of extra jobs in addition to those lost due to the crash. By next year, he expects the US unemployment rate will be “improved, yes, but still very, very high at 6.5%.” And the FOMC does not predict a return to what Strauss termed a more normal rate, or about 5.3% to 5.8%, until 2016.
“When we meet again next year,” he concluded, the economy will have more strength, “but still with tremendous slack.”