Could 2014 Be The Year The Economy Doesn't Disappoint?

Each of the past several years has begun with optimism that this would be the year the U.S. economy pulls itself out of the doldrums. And each year that optimism has been dashed. Steve Inskeep talks to David Wessel, head of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution, and a contributor to The Wall Street Journal, about why so many analysts have an optimistic view of this year's economy.

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RENEE MONTAGNE, HOST:

It's MORNING EDITION from NPR News. I'm Renee Montagne.

STEVE INSKEEP, HOST:

And I'm Steve Inskeep, good morning.

Once again in this New Year we're asking if we could finally see a year when the U.S. economy takes off. The recovery is years old now. But as millions know firsthand, we have yet to see that explosion in hiring or growth that would signal good times are back.

Economists are optimistic about the coming year, as they have been about some pasts ones. And to explore that optimism, we call on David Wessel. He's a regular guest on this program. He is now director of the Hutchins Center at the Brookings Institution and continues to be a contributor to The Wall Street Journal. David, welcome back.

DAVID WESSEL: Good morning.

INSKEEP: So what's the case for optimism?

WESSEL: Well, last year ended on a very strong note. The U.S. economy grew at a 4.1 percent annual rate in the third quarter - that's pretty good. And it looks like it grew significantly better than three percent in the fourth quarter, so that's encouraging. It suggests some momentum going into 2014 and that's got the forecasters - the private ones, the International Monetary Fund - marking up their projections for 2014.

Indeed, just yesterday the IMF chief, Christine Lagarde, took a cautiously upbeat stance when she spoke at the National Press Club here in Washington.

CHRISTINE LAGARDE: Growth in the United States is certainly picking up, driven essentially by private demand. And that recovery that we have observed in 2013, that unfortunately was dragged by the fiscal consolidation of 2013, will be helped by the loosening of the fiscal corset as a result of the recent budget deal.

WESSEL: And she said that the world economy is doing better though she warned it's not yet healthy.

LAGARDE: Overall, as I said, the direction is positive. But global growth is still too low, too fragile and too uneven.

INSKEEP: OK, so she's not going crazy with optimism here, but she talked about private demand going up, I guess that means people wanting to buy more stuff. And the loosening of the fiscal corset, what is that?

WESSEL: That's wonderful, isn't it?

INSKEEP: Yeah.

WESSEL: Well, what we see is, as she had pointed out - and as Fed Chairman Ben Bernanke has pointed out - that in 2013 the federal government actually hurt the economy. The tax increases and particularly the spending cuts of the so-called sequester held the economy back. But the budget deal, which is just passing Congress now, has eased those spending constraints. And there's more certainty about what tax and spending policy will be for the rest of the year. So in 2014, Washington will be less of a minus for the economy than it was last year.

INSKEEP: And when we talk about private demand going up, does that mean that people are, what, feeling more confident, more willing to spend money? They need to spend money, they can borrow more. What's happening there?

WESSEL: Exactly. So households and businesses and banks are in much better financial shape than they were a few years ago. Corporations have a lot of cash. When they get ready to invest and hire, they can do it. Consumers have reduced their debts. And for those people who are fortunate enough to own a house or own stocks, they're much better off. House prices are up nearly 14 percent over the past year, stock prices up 25 percent. And at least some of those people are spending.

Auto sales are back to where they were before the recession. And the average car on the road now is more than 11 years old, so the auto industry is pretty optimistic that people will have to replace them.

INSKEEP: Oh, because they're just getting worn out. You've got to get new products. But with that said, David Wessel, still hard to get a job if you're looking for one and the latest unemployment report did not look so good at all - only 74,000 jobs added.

WESSEL: Right, that certainly didn't help the case for optimism at all. And it's a reminder, as Christine Lagarde said, that things are better but they're not good. Unemployment is still at a historically high 6.7 percent. And an unusually(ph) high fraction of those without jobs have been without work for more than six months, many for more than a year.

But so many other indicators are encouraging that the December jobs report right now looks kind of like a fluke.

INSKEEP: OK, what could go wrong?

WESSEL: Well, there's always the possibility of some blowup in the Middle East or another turn for the worse in the euro crisis - the countries that share the euro currency. At home there are a couple of big risks. One is that the Fed will move too quickly to withdraw the monetary adrenaline that's been pumped into the economy. And another is that economists will just - I mean that employers will just be so slow to add jobs, and importantly, to raise wages that the spending power of the middle-class will just be crimped.

INSKEEP: OK, David, thanks very much.

WESSEL: You're welcome.

INSKEEP: That's David Wessel of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution, and also of The Wall Street Journal.

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