U.S. outlook for 2014.

• Author: Witte, Willard E.

The United States economy has continued to disappoint so far in 2013. Through the third quarter, the economy managed to grow at an annual rate of just 2.2 percent (see Figure 1). Compared with our expectation a year ago, growth for all of 2013 will probably fall short by close to a full percentage point. The labor market has done somewhat better. We anticipated job growth would average dose to 170,000 jobs per month. Through October 2013, the actual outcome has been 186,000 jobs per month (see Figure 2). If the final two months come in similar to the past three, the full year will be slightly above our estimate. The unemployment rate was down to 7.3 percent in October. By year-end it could fall a little more, which would put it lower than we expected a year ago. However, this is partly because people have continued to drop out of the labor force. The employment rate (the ratio of those employed to the population) is currently at its lowest level in over three decades.

Looking at a longer time frame of data, the past decade can be broken into four different phases 1. Phase

1: The pre-recession period (2004-2007). During phase 1, the economy stumbled into a set of serious imbalances. The prime movers were the huge housing boom and an associated financial bubble. These fueled unsustainable levels of consumption (as households cashed out inflated home equity) and state and local spending (paid for with inflated property tax revenue).

2. Phase 2: The Great Recession. When the inevitable collapse occurred, the second phase began. This was the Great Recession, after which the economy needed to rebalance itself. Rebalancing required a set of painful adjustments: housing and local government needed to significantly downsize and consumption needed to downsize--a little in the long run and more in the short-term--as households saved in order to rebuild their balance sheets.

3. Phase 3: Stimulus and Stall. Unfortunately, these adjustments were hampered by government policy. The huge stimulus package tried to prop up housing and stimulate consumption. It augmented state and local revenues. This produced some temporary improvement in the first year after the recession, followed by a swoon when the programs ended. The stimulus and stall lasted through 2010.

4. Phase 4: Healing. During the fourth phase, the economy has finally been moving on with its healing process. Housing has downsized, and during the past year and a half has come back to life. Households...