The state and national economy will continue to expand at a modest pace throughout the remainder of this year. HIS Global Insight's forecast cites a number of factors influencing the state and national economies. What are these factors and how are they affecting the situation?
The politics in Washington D.C. by most accounts has had a negative influence on the economy. The immediate damage caused by the government shutdown has been estimated to be $24 billion. Closing the government disturbs economic relationships and increases business risk. Will the government in the future be a reliable business partner? Will U.S. honor its contracts? With the possibility of future disagreements in Washington, will households and businesses spend and invest at the same level as they would in the absence of such risk? To the extent there is a perceived increase in risk, patterns of economic behavior will be altered and the economy will be affected in a negative way.
Along the same lines, the very notion that the debt ceiling would not be raised creates additional uncertainty and risk to the economy. The potential disruption from a default would have been very damaging to the nation and state. Even if a default did not materialize, the trust in our nation's political institutions is weakened by such actions.
The automatic spending cuts coming from the so-called sequester, have produced a drag on the economy. Cuts in spending reduce demand, income and employment. Most economists believe that the across the board cuts have already reduced GDP growth. The nonpartisan Congressional Budget Office forecasts that Real GDP in 2013 will be 1.4 percent lower because of the spending cuts. The reduction in spending was about $42 billion in 2013, and is projected to reach near $90 billion in 2014.
Emergency unemployment compensation, a form of fiscal stimulus, was extended into to 2013. However, this will be phased out in the coming years. The HIS Global model suggests this action will also dampen economic activity by taking spending out of the economy. The continued economic weakness in the Eurozone means that exports to this important trade partner will be less than it would be otherwise. The economic malaise in the Eurozone has been caused in part by the turmoil resulting from the great recession. In an attempt to deal with the problem, the European community adopted an austerity program to reduce budget deficits. This too has reduce demand and contributed to the slowdown in Europe.
Even with these negative elements affecting the economy, the forecast is still positive for Wisconsin and the nation for 2014. Wisconsin's total nonfarm employment is expected to grow from 2.82 million in 2013 to 2.9 million in 2014, a modest increase of 1.4 percent. The unemployment rate is forecasted to drop from 6.9 percent in 2013 to 6.5 percent in 2014. Further, Wisconsin's personal income will grow by 4.6 percent in 2014 compared to 1.9 percent in 2013.
For the U.S., Real GDP is predicted to grow by 2.8 percent in 2014. Payrolls will grow by 1.6 percent and the unemployment rate will fall by four tenths of a point in 2014, down to 7.2 percent. Personal income will rise in the U.S. by 5.1 percent in 2014, to $14.5 trillion. Corporate profits will gain momentum, climbing from $1.9 trillion in 2013 to $2.1 trillion in 2014, a gain of 4.2 percent.
The jobs number for September was disappointing and less than forecasted for the U.S., coming in at 148,000 positions. The forecast for inflation in 2014 calls for the CPI to increase by just 1.6 percent. The Federal Reserve, the nation's central bank, will most likely conclude from the weak job numbers, the low inflation projection, and other economic data that it needs to continue its program of quantitative easing. This means the Fed will pump more liquidity into the economy. It will do this by purchasing large quantities of U.S. debt, approximately $85 billion per month. The Fed now holds a staggering $3.6 trillion in U.S. Treasury securities on its balance sheet. The continuation of the quantitative easing means that interest rates should remain low and stock prices will remain at elevated levels.
Finally, the consensus among economists is that the economy is improving in spite of the headwinds created by Washington. One can only imagine how much more robust the recovery would be if the political discord could be resolved.
Randy Cray, Ph.D., is the chief economist at the University of Wisconsin-Stevens Point's Central Wisconsin Economic Research Bureau.