Mo-cro Economics for 2014

Thanks to Buck for looking back and summarizing 2013 last week. Today I take a look into the future. I begin with a brief (haha) discussion of the economy in 2014. Then I turn to singular events that might occur in 2014. 

When one forecasts economic growth one-year ahead he has to look at several things. First are the longer-term trends that are playing out. Long-term trends are usually pretty well known and have their impacts dispersed over several years or even decades. Population changes, industrialization, and globalization are often cited as impacting GDP gradually over many years. The year ahead is also impacted by events we call shocks -- unexpected factors that come and go -- often unpredictably. For example, extreme weather changes may cause food or energy prices to fluctuate much more than one might have ever expected. A third factor impacting the forecast for one year ahead is momentum. 

We already know a little about how long-term trends may slow economic growth in 2014. As for shocks, they are largely unexpected and can not be forecast well. The interesting factor for 2014 is momentum. When you say that your team is on a roll -- you are citing the power of momentum. You might not be sure of exactly why they are winning, but each time they win another game it gives you confidence they will win another one. If momentum is strong it totally subjugates long-term trends because you admit that the usual cause and effect might not be at work. This also ignores random or shock events that might affect future wins or losses. It just says -- the economy seemed to strengthen last year so I guess it will strengthen more this year. Note -- there might be lots of reasons for concern about the coming year based on known trends -- but momentum seems somehow to swamp all that -- at least for a while. That's what I mean by Mo-cro Economics in 2014. 

Momentum makes intuitive economic sense. This is because in macro we have two factors that often operate. The first is the jobs-income-spending-jobs link. As job growth improves so does income, spending, and then jobs. Even if the growth of jobs improves only a little compared to the previous year -- momentum is carried forward by the expected improvements in incomes and spending. Second, expectations matter. In a deep recession people hunker down. The uncertainty about the future worries people and limits their spending as they ready themselves for perhaps worse times. But after several years of economic growth, this negative mentality wears down. Goods get older and need to be replaced. As the economy improves and expectations get more sanguine -- people spend more -- incomes and jobs grow faster. 

2013 was seen as one more year distancing the US economy from the memories of the recession that ended several years ago. While not every macroeconomic indicator improved, the large body of them did. Especially important was the improvements in employment. I am guessing that at least in 2014, this wave or momentum will steadily build and produce continued gains in employment, income, and spending. 

Notice what this says and doesn't say. First, we should expect overall national economic growth in 2014 to be as least as strong as it was in 2013. Second, whatever long-term trends threaten us, they will likely be swamped by momentum in 2014. Third, shocks may arise that make this forecast very wrong. But since it is impossible to forecast the unexpected, we let that remain as it is. 

The last time I did forecasts was in December 2011 for the year 2012. Since I was wrong on all 13 forecasts, I decided to take a year off. But I am back again to try for 2014. Below are my non-economic forecasts for 2014. 

1. Pope Francis and Barack Obama will marry in Sochi and will honeymoon in Havana

2. Victor Oladipo will run for president despite the fact that 2014 is not a presidential election year and he is not old enough to run

3. Psy and Miley Cyrus will team up and start a new dance craze called the Gangnam Twerk

4. The Nobel Peace Prize will go to Kim Jong Un and Dennis Rodman

5. A new International trade treaty will result in free trade zone comprised of Iran Israel, Iraq, Illinois, Iowa and Indiana. It will be called the I-Zone and all citizens of the I-Zone will receive free I-phones, I-pads, and I-balls.

6. Airlines will allow unlimited phone service on all flights and will issue all customers without phones noise cancelling headphones and boxing gloves.

7. Janet Yellen will promise to keep interest rates at zero percent until all baby boomers have left planet Earth or until eight-track players dominate the music scene again, whichever comes first.

8. Boeing will settle a new labor pact with their union allowing all Seattle manufacturing employees to smoke doobies at lunch.

9. Joe Biden will cackle like a hyena.

10. Obamacare will be replaced by Hillarycare. You will sign up for your policies using colored crayons.

11. Gillette Blades will become the new official sponsor of Duck Dynasty

12. Fifty years ago Congress passed a resolution allowing the President more freedom to authorize combat actions against North Vietnam. Next year Congress will pass a resolution authorizing the President to do pretty much whatever he wants to do. 

13. Downton Abbey will be overtaken by jihadists.

14. This blog will continue to spout. Happy New Year all!