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suscribejpg Exclusive: Let There be Light . . . at the End of the Tunnel

February 2014
Anirban Basu,  Chairman & CEO of Sage Policy Group, Inc.

Anirban Basu, Chairman & CEO of Sage Policy Group, Inc.

The U.S. economy has been stuck at 2 percent growth for several years and throughout much of 2013. Imagine a sports car with incredible get up and go, but one that had to constantly negotiate a series of speed bumps that permit it to only travel between 30 and 40 miles per hour. To complete the analogy, that translates into sub-par economic growth and an unemployment rate still hovering around 7 percent after more than 4 years of economic recovery. In 2013, the US economy expanded 1.9 percent and unemployment ended the year at 6.7 percent.

However, the outlook for 2014 is as positive as it has been for any year since the onset of the financial crisis. There are a number of factors at work. The world economy is now strengthening, with accelerating growth apparent in China, parts of Europe, the U.S., and in a host of emerging nations. Accordingly, the International Monetary Fund projects that the global economy will expand 3.7 percent in 2014 after expanding 3 percent in 2013.

There are other tailwinds that more specifically impact the U.S. economy. The nation now enjoys greater certainty regarding its federal budgetary and Federal Reserve monetary policies. Seemingly against all odds, the federal government recently passed a budget that guides spending into 2015. On December 18th of last year, the Federal Reserve announced that it would begin to taper its bond purchase program beginning in January. Rather than purchasing $85 billion each month in assets, the Federal Reserve would taper its purchases to $75 billion per month. A bit more than one month later, the Federal Reserve announced that it would taper again, this time to $65 billion per month.

Equity investors have not been excessively troubled by the announced reductions in bond purchases by the Federal Reserve. First, the Federal Reserve has introduced language suggesting that short-term rates will remain low for many quarters to come. The announcement also reduces the level of policy uncertainty and markets don’t like uncertainty. Finally, the decisions to taper imply that the Federal Reserve’s forecast for U.S. economic activity has improved since its September 2013 meeting.

True, equity markets have been volatile more recently and as of this writing had given back roughly 4 percent of their value relative to prior highs. But much of this weakness is attributable to worrisome economic news flowing from abroad, including from key emerging nations like China, Turkey, Indonesia, and Argentina.

There’s more at work than policy shifts. Gas prices have fallen, helping to increase consumer disposable spending power. Corporate performance remains solid. A majority of large U.S. corporations beat their earnings estimates during last year’s third quarter and fourth quarter announcements have been similarly benign. However, a materially smaller share have beat their revenue estimates, implying that companies continue to aggressively manage costs to boost bottom line performance. With economic growth now accelerating both nationally and globally, corporate America may have an opportunity to rapidly expand both their respective bottom and top lines.
In general, regions of the nation enjoying the fastest recovery are those that are associated with rapidly rising populations (e.g., Texas, Florida), surges in energy production (North Dakota, Texas, Louisiana), increased industrial output (Indiana, South Carolina) and rapidly recovering housing markets (Florida, Georgia, Arizona). These regions are likely to continue to expand more rapidly in 2014.

Will Maryland Catch the Tailwinds?
Maryland was a willing participant in the nationwide recovery and continued to post solid economic performance numbers throughout 2013. For instance, between December 2012 and December 2013, the state added 36,000 jobs or 1.4 percent according to the Bureau of Labor Statistics. The State ranked 22th in the nation with respect to year-over-year percentage job growth over that period. Statewide aggregate employment has now surpassed its December 2007 level, the month during which the Great Recession began.
Despite a promising outlook for the global and national economies, there is cause for concern in Maryland. Like a facemask-wearing stalker in a 1980’s horror movie, the State’s structural deficit refuses to permanently disappear. What was once estimated to be a $300 million surplus for FY2014 is now an $87 million deficit. The budgetary gap rises to $400 million for FY2015. It is critical that Annapolis resolve these shortfalls without further impacting the state’s business climate and reputation.

Moreover, many of the sources of growth that will sustain the national recovery in 2014 have less of an impact in Maryland, including expanding energy and industrial production. The state’s economy will benefit, however, from wealth effects stemming from both equity and housing markets as well as the recent relaxation of sequestration-related federal spending constraints.

Anirban Basu is Chairman & CEO of Sage Policy Group, Inc., an economic and policy consulting firm in Baltimore, Maryland. Mr. Basu is one of the Mid-Atlantic region’s most recognizable economists, in part because of his consulting work on behalf of numerous clients, including prominent developers, bankers, brokerage houses, energy suppliers and law firms.