Supply Chain Managers Told to Prepare for Demand Surge in 2014

Improved economic fundamentals will drive an acceleration in 2014 growth, said IHS Global Insight economists. In November’s “flash forecast,” supply chain managers were told to prepare for a surge in the demand cycle.

So far this month, there have been two positive surprises in the newly released economic data, said Chief US Economist Doug Handler.

“Third-quarter real GDP grew at a 2.8% annual rate—well above consensus expectations, although 0.8 percentage point of this growth came from increased inventories,” he said. “We believe at least some of these inventories were unplanned, triggering offsetting forecast changes in the coming months.”

The other surprise concerned employment, said IHS. In October, the month when the government shutdown occurred, 204,000 new jobs were created on top of strong upward revisions to the August and September data. The net findings are that the economy currently has an underlying trend growth rate of about 2.0–2.5% and that the shutdown had little effect on private sector hiring (i.e., indirect impacts) and probably little effect on spending and investment.

With the strong employment report, near-term growth prospects look good, but for the inventory-driven headwinds and the direct impact of October’s shutdown on federal government output. Once these headwinds dissipate, economic growth will accelerate from 1.7% in 2013 to 2.5% 2014, and even slightly faster in 2015.

Looking at the major sectors, consumers appear to be inured to the rancor coming from Washington. Over the past six quarters, consumer spending contributed between 1.0 and 1.5 percentage point to overall growth in each quarter—no more and no less. The unflappability of the consumer is probably one of the strongest and underreported aspects of the economy.

Another feature of the new third-quarter data is that the federal government’s contribution to GDP growth was minus 0.1 percentage point—also a very positive development. The October agreement to end the shutdown and temporarily suspend the debt ceiling also calls for negotiations on the fiscal 2014 budget. It is impossible to predict what the outcome will be, but for the time being, we continue to assume that a budget deal will replace the sequester with longer-term tax increases and spending cuts focused on entitlements. However, the ultimate content of this budget remains a risk factor for the first quarter of 2014 and beyond.

Once these short-term issues are resolved, economic growth should accelerate throughout 2014, led by an upturn in housing and equipment investment and the absence of any major government spending drag. Consumer growth also accelerates as a result of continued increases in employment. Improved employment reports such as October’s will become more the norm next year.

These demand conditions set the stage for a possible start to the Federal Reserve’s tapering of quantitative easing in January or March.

December remains a possibility, depending on the strength of the November data and the budget negotiations. This forecast also includes the unemployment rate hitting 6.5% in early to mid-2015, which the Fed has stated is a threshold for raising the federal funds rate, ostensibly considering other economic factors, too.

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