U.S. outlook for 2015.

• Author: Witte, Willard E.

The United States economy has given clear signs that it is finally breaking out of the rut that it had been stuck in during the first four years of the "recovery." The improvements in the past year are generally in-line with our predictions made a year ago. Looking ahead, we expect the coming year to produce a continuation of these positive trends. But this favorable outcome is far from a sure bet. The level of uncertainty in the current environment is high. As we took the Business Outlook tour on the road, our catch phrase was "apprehensively optimistic."

The first four years of the recovery (mid-2009 through mid-2013) were remarkably uniform on average. There was the normal quarter-to-quarter volatility, and also some temporary impact from the stimulus program, but even these were muted. The pattern of this period had output growth that averaged just 2 percent, about a full percent below the pre-recession norm and also below the long-run potential of the economy.

This subpar situation was driven by consumption growth in-line with the overall economy, business investment that was sluggish by historical norms, and a housing sector that was recovering but from a very low base. Growth was held back by decreased government spending as states and local governments adjusted to a significant budget crunch due to both a decrease in revenue and to over-expansion during the pre-recession boom.

In the labor market, employment increases averaged about 175,000 per month and the unemployment rate declined at just short of one tick per month. Unfortunately, a significant part of the fall in unemployment was due to very sluggish growth in the number of individuals participating in the labor market, as the labor force participation rate fell to its lowest level since the 1970s. The employment gains, which were unimpressive compared to previous recoveries, were also characterized by a large number of part-time positions. Overall, this recovery was indicative of an economy in a rut, which is better than being in the ditch, but still disappointing.

Now, things are looking up. As seen in Figure 1, GDP (in chained dollars) over the past five quarters has been growing at an annual rate of 2.8 percent, with four of those quarters well above 3 percent. (Admittedly, the outlier [2014 Q1] was pretty bad at -2.1 percent, but that was partly due to terrible weather.) Components have mostly picked up, as well. Consumption continues to parallel overall growth, with auto...