Economic Outlook, November 2013

Earlier this year, I argued that annual GDP growth would likely be roughly 3 percent. I have since revised downward my estimate to roughly 2 percent. However, I still see room for optimism regarding our fundamental prospects, in contrast to some “stagnationists,” who see growth as becoming increasingly harder to achieve over time. Among the reasons for decreased growth estimates is a post-crisis belief among lenders that fewer consumers may be creditworthy borrowers. Compounding that, many consumers themselves have become more cautious in their spending behavior. Policy uncertainty has led some businesses to postpone possible investments. Productivity growth is unlikely to change much, averaging roughly 1 percent per year. Employment growth is hard to forecast, though it seems that it, too, will likely continue to remain close to the recent trend of 0.9 percent, perhaps slightly lower. As the Affordable Care Act is fully implemented, though, the cost of hiring may increase. In addition, in some areas there seems to be significant mismatch between the jobs needed and the skills of workers seeking opportunities. Even though the federal funds rate is effectively at the zero lower bound, this does not mean that the Fed has no tools to attempt to stimulate economic activity. It is unclear to me that further stimulus would achieve desired results, however, but it could make it more difficult for the Fed to ultimately pursue an “exit policy” from its extremely accommodative stance.