If the U.S. economy were a racehorse, it closed the 2013 race strongly. The outlook improved as the year moved along, providing reasons for optimism in 2014.
We can check off a number of positives from recent weeks:
1. The stock market rallied to record highs.
2. Hiring accelerated and the unemployment rate fell to 7 percent.
3. Growth in the fall quarter was revised up to more than 4 percent.
4. Congress agreed on a budget to avoid partial government shutdowns in the year ahead.
Are there prospects for further improvement? Yes, says Doug Handler, chief U.S. economist at IHS Global Insight. By the end of the coming year, he says the unemployment rate will likely be in the "low sixes." The November jobless rate declined to 7 percent.
As for interest rates, Handler says, "I think they will be rising." That will "affect mortgage rates to some extent and other consumer borrowing, as well." Still, he says, "compared with the improvement in the economic fundamentals, we see that increase in rates, really, we expect to be a non-factor." In other words, if the rest of the economy is doing well, a small rise in rates shouldn't be a big deal. For example, if the average for 30-year fixed-rate mortgages were to rise to 5.5 percent, Handler says "that will keep the housing sector growing, but certainly not at the current rate."
What about the risks? Handler reminds us that Congress will need to raise the debt ceiling early in the year. He says the nation's trading partners must have improvement in their economies if the U.S. is to do well, noting Canada, Mexico and China, in particular. "We think that will happen. But that is not 100 percent certain, as well," says Handler.
What do you expect for the U.S. economy in the coming year? What worries you most?
Economy to roar in 2014?
Better U.S. growth is expected in the year ahead. But what does that mean for jobs and interest rates?
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Mark Hamrick: From Bankrate.com this is Your Money This Week. We connect the dots between what's happening in the world and your wallet. I am Mark Hamrick reporting from Washington. Has it been a year already? 2013 brought record highs for the stock market, the threat of a government default and signs of economic recovery. What should we look for in the year ahead? We'll talk with economist Doug Handler with IHS Global Insight. Bankrate's Doug Whiteman tells us about the kinds of insurance that are must haves for young people and a look back in business history at a colorful, but extremely wealthy American character. All of that and more coming up on Your Money This Week.
It's not perfect by any means, but by several measures, the U.S. economy is looking increasingly more positive as it continues to recover from the financial crisis. The positives include an improving job market and there's even a federal budget in place for 2014, meaning a shut down is off the table. We talked about the outlook with Doug Handler; he's the chief U.S. economist for IHS Global Insight. Well, Doug I guess the first question is, it looks as if your outlook for the coming year in the US is a little more upbeat than what we've seen for the economy in the recent past. Why are you feeling more optimistic about the U.S. economy?
Doug Handler: Well, actually we've always had an upturn in our forecast for quite a few months here and if there's a negative aspect in the forecast, we might have been bitten a little bit by pushing out the timing of that upturn, but finally, it does look like it's going to arrive here. There are actually a lot of reasons why we're so optimistic about the recovery. Pretty much all the major sectors are expected to contribute somewhat to GDP (gross domestic product) growth. Consumer spending is growing at a moderate and sustainable level here. We're seeing improvements in the housing market. It was a fantastic housing number earlier this week that'll really help to kick of residential investment growth in 2014.
Growth among the U.S. trading partners will help U.S. exports, and last and absolutely not least is that, a lot of the issues in Washington that were really exerting a lot of gloom and doom through increased risk on the economy are being resolved. We'll be getting a budget soon. The Fed tapering process that has begun and the market seems to be fairly accepting if not even welcoming of this. So really lots of good reasons to actually think 2014 really will be the year where we start to see better growth.
Mark Hamrick: OK, so I think the one thing that we've talked about over the past year, in other words, broadly, there's been a conversation about the fact that the job market's recovery has really been subpar and over recent months, as we know, we've seen the unemployment rate fall to 7 percent and payrolls' growth has been more respectable and I guess we're expecting that to be sustained. But it always has been kind of characterized as a subpar recovery. Do you think we can shake that at some point in the near future?
Doug Handler: I think it'll still be a subpar recovery relative to other recoveries. 2014 put in the context of the last few years will be a lot better, but there are still some issues that are affecting employment. A lot of them are structural that is going on in the labor market as well in that, we're seeing really the impact of a lot of technology coming into the way people do their jobs. We're seeing also, a lot of globalization of the markets, which really steps up the competition for many good services as well. But keep pressure to keep costs down and actually it'll keep the job growth a little below where it should be. That said though, the 200 jobs a month pace that we've gotten recently we do expect to continue, and it's not as good as it could (be), it's not as good as in past recoveries, but it ain't bad.
Mark Hamrick: And so we if we were to be speaking in the month of December in 2014, i.e. about a year off, where do you think the unemployed rate will be about that time?
Doug Handler: I think we're going to be in the low sixes (6-percent range). Actually, we're going to see this slow, steady improvement in the unemployment rate. There still is going to be a continual drop off in the labor force participation rate. That is more of a systemic problem and more of a demographic problem as well that is going to continue as well. But pretty much I think what you've seen for the last two or three months is going to be extended for the next year or so.
Mark Hamrick: So as we speak, we now have in the rearview mirror, the Federal Reserve decision to begin scaling back the extraordinary asset purchases that it has been engaged in for well over a year now, in terms of the a so-called QE3. Does that mean that interest rates that consumers rely upon, whether they are for mortgages, credit cards, car loans and the like, will they be seeing those interest rates rising over the course of the next year?
Doug Handler: Well, I think they will be rising, but it'll be impossible to determine if that rise is due to just a faster growing economy in general that'll force up rates or due to some of specific impacts that come from the QE3 abatement here. We do see higher interest rates as part of that vast growth profile that will affect mortgage rates to some extent and a little bit to other consumer borrowing as well, but compared with the improvement and the economic fundamentals, we see that, increasing rates really we expect to be a nonfactor.
Mark Hamrick: I think I saw where the nation's real estate trade group or the National Association of Realtors had forecast that the 30-year, fixed-rate mortgage might be at about 5 and a half percent by the end of 2014, and I was thinking and I wonder if you agree, that still is rather extraordinarily low.
Doug Handler: Five and a half percent will keep the housing sector growing, but certainly not at the current rate as well. Of course there are a lot of things consumers can do to mitigate the impact of those mortgage rates to. Rates get high typically; we see a shift toward more adjustable-rate that'll have the lower rates at least in the beginning periods here as well. So given that the growth that we have given, the fact that, consumers I think can mitigate some of this growth through some creative sort of financing as well. Really don't see this as being a major problem next year.
Mark Hamrick: Doug, what would continue to worry you about the U.S. economy in 2014, whether it's a major risk or just something that…you already talked about the structural changes and the job market, but what is it that you say, oh boy, I hope that one doesn't sort of bite us?
Doug Handler: Well, we still have the debt ceiling discussions going on. I am very happy that it looks like a budget is going to be passed through the end of fiscal 2015. That's fantastic news. It's maybe not the optimal sort of budget or the optimal way to get a budget, but that removes a risk factor to the economy. However, there was really nothing done regarding the debt ceiling, which is the other problem that we need to address. We absolutely don't want a rerun of what happened to mid-October here where we approached the debt ceiling and we get all these default scenarios coming up here. The potential to have that repeated in February is very strong apparently and it's very avoidable as well. That is a problem.
A second concern is the fact that, part of our optimism for 2014 centers on export growth and that itself is predicated on improved growth in Europe, improved growth in many emerging markets as well with whom we trade, particularly Canada. Canada ... well, Mexico and China. Canada of course is not an emerging market here, but we really do need to see strong economic fundamentals in these areas as a requirement for that growth was well. We think that'll happen, but that is not 100 percent certain as well.
Mark Hamrick: So yes, we are part of a global economy and it's good. It would be good to have at least a majority of all those cylinders firing. Doug Handler, thanks so much for your time. Great catching up with you.
Doug Handler: Thank you very much. Nice speaking with you.
Mark Hamrick: Doug Handler, he's the chief U.S. economist for IHS Global Insight. Part of being young brings a feeling of invincibility. It's only with the advancement of aged does a sense of mortality set in for most of us. Of course, no one is truly invincible, which brings us to our next report from Bankrate's Doug Whiteman. He says there are just some kinds of insurance the young should not go without.
Doug Whiteman: You're young, you're healthy and you don't want to spend much on insurance, but how little is too little? Can you go without? The second question is easy. No you can't afford to go without insurance, because an accident, natural disaster or serious illness could leave you facing a big financial setback and wishing that you had some coverage. With auto insurance, most states require you to carry a minimum of liability coverage. The Obama health insurance law mandates that you have some health insurance or pay a tax penalty of at least $95. Going bare on home insurance or renters insurance is a huge mistake. Much too much risk, particularly if you're found liable for damage or injury to someone else. You could lose your shirt and a whole lot more, so take advantage of available discounts to get the best rate on a policy. For more on when not to go naked on insurance, visit Bankrate.com. I am Doug Whiteman.
Mark Hamrick: Finally our look at this week in business history. On Dec. 24, 1905, wealthy businessman Howard Hughes was born in the state of Texas. He was an industrialist an inventor, a filmmaker and an aviator. He was also something of an enigma. Hughes died a reclusive billionaire in 1976. His life was of course, portrayed in the 2004 film "Aviator" directed by Martin Scorsese and starring Leonardo DiCaprio as Hughes.
You've been listening to Your Money This Week. Thanks to our guest economists Doug Handler of IHS Global Insight. If you enjoyed the podcast, please check us out on iTunes and rate and subscribe to the program. I'm hoping that you can help us to get the word out. Also check out our other podcast, special report with breaking news and special features. For more on this and other personal finance issues, visit Bankrate.com and you can follow us on twitter @Bankrate. Thanks to producer Lucas Wysocki for his work in the studio. I am Mark Hamrick. From all of us here at Bankrate, here's hoping you have a great week.