Supply Chain Managers Confront Mixed Economic Forecast

According to IHS Chief Economist Nariman Behravesh, “the glass is more than half full…or soon will be.”

First, the bad news.

Because of multiple headwinds, it has been difficult for the US economy to gain momentum and grow at rates that are more typical for the fifth year of a recovery. The government spending sequester (now expected to last at least through the end of the year) will hurt growth through the fourth quarter. A protracted recession in the Eurozone and weaker growth in emerging markets mean that there are no lifelines for the United States from the rest of the world. This is hurting manufacturing and prompting businesses to remain ultra-cautious about hiring and capital spending.

Now the good news.

The underlying growth rate in the economy is stronger than the headline numbers suggest. The January tax hikes and the subsequent spending cuts have reduced GDP growth by approximately 1 percentage point. As the impact of this fiscal tightening dissipates, growth will rebound—likely by late this year or early next year. While the robust (3.4%) first-quarter growth rate of consumer spending is unsustainable, US households will be able to maintain spending growth of 2.0–2.5% this year and next.

Family finances are becoming much more healthy, payroll jobs growth is running at a solid pace of 150,000–200,000 net new jobs each month, credit conditions are easing, and consumer sentiment is at the highest level since July 2007. Thus, the consumer will provide a solid foundation for growth. On top of that, residential investment will probably grow at a 15–20% annual rate and nonresidential fixed investment will increase at a 4–7% rate (mostly driven by business spending on equipment). All this adds up to growth in the 3.0–3.5% range for most of 2014—once the headwinds from fiscal austerity and weak global growth diminish.

SC
MR