SOURCE: BMO Harris Bank

BMO Harris Bank

December 16, 2013 13:52 ET

BMO Economics 2014 U.S. Outlook: Heading for a Breakout Year

CHICAGO, IL--(Marketwired - Dec 16, 2013) -

  • U.S. economy will set up in 2014 for continued growth into mid-decade
  • Projection for 2014 pegs U.S. GDP at 2.7 percent, nearly a full percentage point above estimated rate for 2013
  • Key drivers include improved household finances, business investment and export growth

With the economic headwinds from 2013 starting to abate, the New Year will usher in stronger growth throughout 2014, according to BMO Economics' 2014 U.S. Outlook. U.S. GDP is expected to grow at 2.7 percent in the coming year, coming in almost a full percentage point above the estimate rate for 2013, which was 1.8 percent.

The report outlines a number of challenges that led to the past year being a slower one. Despite consumer and housing markets meeting expectations, and auto sales ramping up to a six-year high, businesses took a step back amid uncertainty in Washington and exports took a hit from shrinking global demand, noted Michael Gregory, Head of U.S. Economics, BMO Capital Markets. The federal government's move to cut spending and increase taxes was also a factor.

"The last 12 months brought its fair share of challenges, but the good news is the clouds are parting," said Mr. Gregory. "We expect consumer spending will see an uptick to 2.6 percent in 2014. Household wealth is now at record levels, coupled with less debt, improved prospects for employment and lower gas prices will all contribute to regained consumer confidence."

The fiscal drag, which knocked off 1.5 percentage points from growth in 2013, will become increasingly a non-issue, according to the report. The budget deal reached this week means spending cuts will be halved to $45 billion. At the state and local levels, government spending could push growth slightly higher. States are lowering taxes and putting more money towards infrastructure, while cities are growing their workforce after impactful cuts during the recession.

Home Improvement

The housing recovery is expected to continue to drive spending. Purchases of household furnishings and appliances were going strong at seven percent in 2013. Credit quality at the consumer level is improving, which will lead banks to loosen some of their lending standards, encouraging credit growth overall.

"Residential construction, which saw double-digit gains the last two years, should continue that pattern for the third year in a row," said Mr. Gregory. "While mortgage rates are edging slightly higher it will not take a major toll on affordability, and first-time homebuyers will have a market they can work with. Home prices are expected to grow a slower pace than the 12 percent boom in 2013."

Businesses Get a Boost

"Less political uncertainty, reaffirmed with this week's budget deal, will be a plus for businesses," said Mr. Gregory. "Business confidence should improve as long as debt ceiling gridlock is avoided and non-residential investment growth will grow at a five percent clip. Companies in the U.S. are sitting on more cash than ever, and as optimism improves those dollars will be unleashed."

Businesses have also seen solid productivity gains, and 2014 will be a year of improved U.S. competitiveness, leading to a 6 percent increase in exports. A lighter energy trade deficit and high oil and natural gas domestic output will help to support growth on the global stage.

Easing into the New Year

The main risk factor to the economy in 2014 will not be fiscal policy risks but lingering question marks on the monetary side, noted Mr. Gregory.

"All signs point to the Fed starting to taper sooner than later, either next week or in early 2014. What remains unanswered is the exact start, degree and distribution of the reduction in assets. Near-term risk of even lower inflation risk is the main constraint against odds for a late December move."

"As for degree, it will likely be a slow start. We look for a per-meeting pace of $5-to-$10-billion at the outset, picking up to $10-to-$15 billion, which we would see the end of quantitative easing by Q4. In terms of distribution, we expect an even split between Treasuries and mortgage-backed securities, adjusting for the constraint of $5 billion increments."

Ten-year Treasuries have already begun to price in the imminent tapering, and are currently trading at 2.9 percent. At least a small negative market reaction is expected at the outset, and by the end of 2014 yields will reach 3.5 percent.

To view a full copy of the report, visit http://www.bmocm.com/economics

About BMO Capital Markets

BMO Capital Markets is a leading, full-service North American financial services provider, with more than 2,300 employees operating in 29 offices worldwide, including 16 in North America, offering corporate, institutional and government clients access to a complete range of investment and corporate banking products and services.

Contact Information