News Column

4 Roadblocks to Economic Growth

January 3, 2014

USA Today

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Detours remain on the road to economic success (file photo)

Here are four key reasons why we can expect the U.S. economy to continue struggling in 2014.

1. D.C. is not that good -- and we still have the debt ceiling.

Federal spending cuts will still shave a few tenths of a point off GDP growth this year, reducing the growth rate about 0.3 percentage points, Naroff said. The main risk from D.C. early in 2014 is that there may be another showdown over the debt ceiling. House Budget Committee Chairman Paul Ryan said Republicans want concessions for raising the borrowing limit before March -- but haven't decided what.

2. Capital investment is low.

Growth in spending on business equipment, the investment category closely tied to boosting productivity, plunged to near zero by the third quarter from a double-digit pace in 2010 and 2011, helping fuel a $2.2 trillion "investment gap," of money not spent since 2007, says the Progressive Policy Institute. In 2014, it's expected to grow just 3.1%, the Equipment Leasing & Finance Foundation says.

This problem may evaporate by the second half of the year, especially if consumer spending sustains its recent pickup into early 2014, Goldman Sachs economist Jan Hatzius argues. Historically, capital spending has depended on consumer spending and credit availability -- and both are improving, he says.

3. Interest rates will rise this year, which may slow the housing recovery.

As the Federal Reserve reduces and eventually ends its $85 billion of monthly bond purchases, mortgage rates are likely to rise, as they did in the summer, when the Fed first hinted at the "taper." In 2013, that blip caused momentum in the housing recovery to stall briefly.

With the average rate for 30-year mortgages now 4.48%, up from 4.1% in late October, and the National Association of Realtors projecting that they will rise another percentage point next year, it's too soon to know whether higher rates will slow the hoped-for construction boom. New-home sales and construction data from the fall suggest not. But it's a risk that bears watching.

4. Wage growth is still tepid, and a recent improvement is not well-established.

After a long decline, wages and personal income turned higher in late 2013. The hope is that workers will get better raises as unemployment falls toward 6%. But the average gain in the last 12 months is just 2% -- enough to offset the expiration of the payroll tax holiday last January, but no more than that.

If employers keep the upper hand in wage talks, that hurts consumer spending and home buying -- and risks another year of sluggish growth. Goldman's Hatzius says consumer spending can sustain its recent gains with inflation-adjusted wage gains around 2%, because rising household wealth and an improving jobs market let consumers save less without taking a risk.

If wages rise faster, that would be the icing on the cake, Hatzius says. Higher wages and more plentiful jobs might also prove key to people forming more households, buying more homes, and even having more babies and spending more on diapers and clothes, Swonk said. The recession and its aftermath didn't just change how people shopped -- it changed how they lived, she said. A lot depends on whether young people who have struggled to build careers and begin families amid the post-2008 mess move on with their lives, she says.

Copyright 2014 USA TODAY

Original headline: Four reasons economy won't break out

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Source: Copyright 2014 USA TODAY