The US economy finished 2013 healthier than it has been since the depths of the financial recession in 2008 and 2009. There were a number of milestones in 2013; many have not been fully appreciated.
First, the US energy production boom has probably adding some 0.5% annually to US real GDP. US crude oil production and natural gas production are already some 40% higher than 2005-2006 levels. But what really has given the economy a big assist is the less expensive energy prices compared to global competitors leading to an industrial renaissance as well as the huge build-out of infrastructure to move the new gas and oil to market. In economics, it is often the case that indirect effects swamp the direct observations, and that is certainly happening with the energy boom.
Second, the hugely positive monetary policy event that occurred at the end 2013 was the change in the Fed’s signaling about the economy. Even though the US economy has been growing at a steady, if not exciting, pace of +2% real GDP since Q3/2009, the Fed has been telling the world that the economy was so fragile it needed life support and emergency measures. Our perspective is that this negative message caused much more damage to confidence than any jobs that might have been created by quantitative easing. The Fed’s negative messaging encouraged corporations to sit on their cash and to be much hesitant to invest and expand than otherwise, while quantitative easing did nothing to help the state and local governments get their finances in order – the sector where the job losses have been concentrated since 2009, which leads us to our next point about the milestones passed in 2013.
Third, fiscal drag diminished markedly in 2013. Most market analysts do not even realize that about 850,000 government jobs were lost between mid-2009 and mid-2013, mostly from states and local authorities. This was a huge drag on the economy and was the main reason job growth was not stronger and the unemployment rate lower. This sector finally stabilized in mid-2013. And then there is the US federal budget deficit, which was vastly expanded to combat the financial crisis. The federal budget deficit peaked in FY2009 at $1.4 trillion (approaching 10% of GDP). For FY2013, the deficit had been cut in half, on the back 8% growth in tax revenues and virtually no growth in expenses. Progress on reducing the federal budget deficit has been coming much faster than many had thought possible.
Fourth, the biggest hurdle of the past few post-crisis years has been resolved. Recoveries from financial disasters generally are longer and more difficult than a recovery from a cyclical economic correction, because financial disasters expose fundamental weaknesses in the over-extended balance sheets of nearly every sector of an economy. The process of deleveraging and rebalancing has taken nearly four years, and now that the process is largely complete, the US economy finished 2013 in the best health it has been since 2003-2006, before the financial crisis.
All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the authors and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.