2014 Economic Recovery Predictions

January 2014
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In the mid-west, 2014 started with a foot of snow followed by double digit
below zero temperatures. No one enjoyed being left out in the cold as 2014
dawned, physically or economically.
But for consensus economists, 2014 started with predictions that 2014 is the
year in which we get a broad strong recovery. The striking thing about this predic-
tion is the tacit admission that the predictions of a strong recovery made at the be-
ginning of each of the last 5 years have been wrong.
One believer, retiring Fed Chair Ben Bernanke, in his
final speech as Fed Chair predicted that the recovery will
pick up steam in 2014 as economic headwinds subside.
Why the optimism? Having
admitted that some government
policies were restraining eco-
nomic growth, Bernanke ex-
plained that he expected a
change for the better. He pre-
dicted that the housing market
Press control and click to on topic to go to Feature
1. Will 2014 Be a Happy New Year?
2. Recent Cartoon
3. The Wise Old Owl

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January 2014
2
would stage a strong recovery, Federal and State governments would back away
from fiscal restraint and increase their spending, lending standards would be loos-
ened, and the European debt crisis would ease as worldwide growth increased.
Bernanke cited the Fed’s continuing its monthly bond purchases at the rate
of $75 billion per month as demonstrating its strong “commitment to maintain a
highly accommodative monetary policy for as long as needed” to achieve its “goal
of substantial improvement in the labor-market outlook.”
Are Bernanke and the consensus economists’ right that, for these and other
reasons, 2014 will be different? Will 2014 be a “Happy New Year?” Bernanke
was wise enough to say, “If the experience of the past few
years teaches us anything, it is that we should be cautious
in our forecasts.” About that, he clearly is right.
There are many pieces of economic data that may be
viewed as supporting Bernanke’s basic optimism that eco-
nomic growth will accelerate in 2014. These include that
wholesale inflation fell 0.1%, while consumer inflation re-
mained unchanged in November. Housing starts surged
22.7% in November, the biggest increase since January
1990, in spite of mortgage rates trending upward. Congress
adopted a budget number reflecting higher spending. The New York and Philadel-
phia Feds reported continuing manufacturing sector growth.
By pumping $75 billion per month into the economy the Fed will continuing
to simulate the stock market and the economy. Its policy of maintaining artificially
low interest rates will also, during the first part of the year, continue to stimulate
the housing market.
However, there are many dark clouds on the horizon that point toward the
second half of 2014 providing a substantially slowing economic trend rather than a
“strong” upsurge. The Fed has been creating stimulus by pouring money into the

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January 2014
3
economy and holding interest rates artificially low for the past five years. At the
start of the recession the monetary system began to freeze. The Fed’s quick action
of putting liquidity into the market clearly helped prevent another potential depres-
sion.
But we are now 5 years later, and there is
very little evidence that continuing to hold interest
rates artificially low and pumping $75 billion in
new cash into the economy each month will con-
tribute to a strong recovery. In fact, the evidence
is to the contrary. Artificially low interest rates
are hurting private sector purchasing power and
the billions in bond purchases may be creating a
number of bubbles that will do even more damage.
Underlying inflation is growing, and there is very little real corporate reve-
nue and profit growth to support the stock market’s current price level. The
growth in the equity market has been based primarily on increasing times earnings
ratios not revenues and profits.
For the Federal and State governments to materially increase their spending,
they need to substantially increase taxes to generate revenues or substantially in-
crease borrowing. Either of these will have the effect of draining needed liquidity
out of the private sector economy costing jobs. With billions in new taxes going
into effect as part of the Affordable Care Act, 2014 is already shaping up to be a
risk. High deductibles and heavily increased premiums will have the same effect
as increased taxes diverting liquidity from consumer spending to higher actual
healthcare costs.
The U.S. is the largest driver of European growth and if our economy slows
we may not see the easing of the European debt crisis or return to growth that Ben
Bernanke predicted. Nor does the improved unemployment picture the Fed Chair

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January 2014
4
cited look so good under close inspection. Total unemployment still is 20.6 mil-
lion people for a total unemployment rate of over 13.27%. Long term unemploy-
ment is up over 50% since January 2009. More than 30% of the unemployed are
long term unemployed and the employment participation rate is at the lowest level
since 1978!
7.8 million people who want full time jobs have been forced to take part
time employment. That represents a 0% improvement over the 5 years since Janu-
ary 2009. Total unemployment has fallen less than 900,000 people in the 5 years
since January 2009 when this government took office!
The economy only added 74,000 jobs in December, with 54% of these being
in the temporary help services sector. Manufactur-
ing added 50% fewer jobs in 2013 than in 2012.
The average work week for all employees, including
manufacturing employees, moved downward in De-
cember 2013. What this reflects is not that condi-
tions have improved over the last 5 years, but that a
substantial portion of the civilian work force has
dropped out of the market, over 500,000 last month
alone.
The long run implication is that a meaningful portion of the middle class has
been permanently affected by government policies designed to ignore job creation
and a strong recovery. The risk is that the U.S. will begin to accept the current
state as a norm, and we will be misled by what is meant by a “strong recovery.”
As my economics professor once said, “statistics never lie, but liars use statistics.”
Think of a widget manufacture with 10 workers that used to produce 100 widgets
per week to meet the demand of a growing economy. A major recession hits and
its sales drop by 20%.

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January 2014
5
Now, because it only sells 80 widgets per week, it has to lay off 2 workers
(20% of its work force). If we have a mild recovery to 3% growth, its sales go up
to 82 widgets, but it only needs 0.24% of one more worker to produce the two add-
ed widgets, so it makes up the production with over time. In reality, even though
we call this a recovery (with growth like 2013’s less than 3%) the business is still
down by 18%. Now, suppose we have a “strong recovery” with 5% growth, like
Bernanke is suggesting.
Even at 5% growth the business only recovers to 4 more widgets for a total
of 84 widgets. Remember the 20% drop was based on 100 widgets, where the 5%
growth is only based upon the current 80 widgets, a much smaller number. So the
business only needs 0.4% of one more worker, so it still just makes up the produc-
tion with over time. In reality, even though we call this 5% increase a strong re-
covery the business is still down by 16% from the start of the recession.
That is part of the problem with understanding how
this recovery is being judged 5 years into it. Three percent
or five percent growth sounds good, but it is from a lower
base and doesn’t get us back to where we started. The labor
statistics cited above demonstrate that, in reality, as sales
have recovered, companies are using technology and over-
time (or part time help) to make up the modest added
productivity needed. The increasing healthcare and pension
costs in 2014 put a premium on adding productivity through
technology, overtime, or part time help. Each of these is far
more profitable because they omit the substantial healthcare
and pension costs.
So far, the consumer does not seem poised to be the driving force in moving
the economy in 2014. To achieve what Bernanke suggests, it will take a strong
business to business expansion in 2014.

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January 2014
6
For a real recovery, we need government policies designed to create a pri-
vate sector, V shaped, strong recovery designed to put people back to work. The
longer these policies are delayed, the harder it will be to achieve this. It appears
that the government will be paralyzed through 2014 in partisan gridlock, thus pre-
venting a coordinated strategy change that would produce a strong recovery.
The monetary policy tools of the Fed alone are a poor substitute for a
strong coordinated approach to job creation and real private sector driven
recovery brought to bear by the combined efforts of all branches of the
Recent Cartoon
The Wise Old Owl
Will
History
Repeat
Itself
in
2014?

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January 2014
7
federal government. As we discussed above, given the governments drift through
2014 with the focus on partisan politics, it is unlikely the government can adopt a
coherent economic approach to job creation and real recovery. That leaves a weak
economy with slowing growth that can turn in either direction at any time based on
unforeseen occurrences. If this drift continues, our strategic partner, the Institute
for Trend Research (“ITR”), suggests that the overall economy will continue to
grow slowly through 2014 and into 2015.
ITR predicts that “it is likely that the first half of 2014 will be better than the
second half and that the timing of the flat spot for the economy will likely come”
as we approach 2015. ITR does caution that “There will be pockets of instability
(market correction) and mild weakness as we finish the year [2014], but no overtly
negative cycle is in view,” with 2015 starting with a substantially diminished
growth rate.
The real caution that we see, absent a destabilizing event, is that the general
stagnant slow growth pattern, may be better or worse depending on which segment
of the economy your business is in. As ITR puts it, “it is very possible that: 1) a
company or market will over (or under) swing the macroeconomic cycle on the
downside, and 2) the timing for many companies and/or markets will be sooner or
later than” the macroeconomic cycle of the economy generally.
In these circumstances each company’s experience may become very differ-
ent from the general economic situation. A close examination of your company’s
market segment and individualized situation and approach to the market is very
important in determining how to move through 2014. This is when customized 5
scenario planning will make a real difference.
Give us a call; we can help you through your customized planning and
achieving improved revenues and profits.

2014 Economic Recovery Predictions

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