Economic Outlook, January 2014

Although recent data releases have some forecasters predicting GDP growth of around 3 percent later this year, my own projection is more modest, around 2 percent. One reason for this projection is greater caution on the part of both lenders and consumers. In addition, policy uncertainty has led some businesses to postpone possible investments. Although residential investment has increased significantly, it makes up only a small portion of GDP. A long-run increase in overall output requires a substantial increase in labor productivity growth or in employment growth. Both productivity and employment growth are likely to remain close to the current trend of about 1 percent. Conditions in the labor market have improved recently, which is consistent with the FOMC's recent decision to reduce the pace of asset purchases. Despite factors that may contribute to slower economic growth, there is still reason to be fundamentally optimistic about economic prospects.