A Federal Reserve official told an audience in Madison the economic outlook for 2014 was "brighter" and predicted growth of 2.5% to 3% in the U.S. economy.
"That would position us for one of the better years that we've seen since the end of the recession," said Esther George, president and chief executive of the Federal Reserve Bank of Kansas City. George, a farmer and native of Missouri, spoke to nearly 500 people at the Wisconsin Bankers Association 2014 Economic Forecast Luncheon last month at the Alliant Energy Center in Madison.
"The U.S. economy has been recovering steadily over the past few years while facing various obstacles ranging from fiscal policy issues to weak global growth," she explained. "As we start a new year, the economic outlook is brighter with real gross domestic product showing steady growth over each of the last three quarters."
One simple reason growth should improve, George said, is because the initial impact of last year's fiscal policy stance has eased.
"The cumulative effect of the mandated spending cuts and higher taxes, by some estimates, was to lower overall real GDP growth by about 1.5 percentage points," she said. "Granted, there will likely be further adjustments to fiscal policy to ensure long-term stability, but with the effects from 2013 fading and the recent budget agreement reducing some policy uncertainty, the growth outlook is more positive."
George said the main reason she believes the economy is strengthening is because consumer spending, which accounts for more than two-thirds of the economy, is strengthening.
"Better labor markets, stronger household balance sheets, and income growth have fostered this improvement," she said. "Real disposable income growth and average hourly earnings in the private sector have been trending higher. Employment growth, too, has been gaining strength, as nearly every major sector has higher employment compared to a year ago. In fact, government is the only major sector to have shed jobs over the past year, but even that trend has shown signs of reversing."
Businesses also are well-positioned to begin increasing investment in new capital, according to George.
"Corporate profits are at record highs, balance sheets are healthy and many firms have the resources to make new capital expenditures and expand capacity. That said, many businesses have remained cautious the past few years due to a number of uncertainties that include the strength of the global and U.S. recovery, the impact of regulations and new laws, and concerns over the direction of both fiscal and monetary policy. To the extent these uncertainties fade and global growth strengthens, as it could if Europe continues to recover, business investment is poised for growth."
George says she is not concerned about inflation.
"Even as growth projections strengthen, inflation measures remain low," she said. "In fact, some have questioned whether inflation is too low given the Fed's inflation target of 2% or whether the United States could face the risk of deflation. I do not share those concerns because several special factors appear to be weighing on inflation measures, such as lower-than-usual healthcare costs, changes in how the price of some financial services are calculated, and low import prices. Additionally, longer-term inflation expectations have remained stable near the 2% goal."
George said she is not convinced that the new regulations — designed to reduce the risk to the economy from banks seen as too big to fail — will accomplish that goal.
"My own view is that incentives have not changed in a way that would achieve the desired outcome of a safer, more competitive financial system." Meanwhile, she said, competitive and regulatory pressures on smaller, local banks have only worsened.
Nationwide, community banks have lost half their market share over the past 15 years, George explained.
"In fact, community banks make more than half of all small-business loans and extend credit in thousands of locales across the country, including rural areas."But George said she doesn't think a two-tiered regulatory system — treating banks differently based on their size — is the answer, rather, an alternative such as separating banking from commerce should be considered.