Will Obama's Economic Forecast Pan Out?

Paula Dwyer writes editorials on economics, finance and politics for Bloomberg View. She was London bureau chief for Businessweek and Washington economics editor for the New York Times, and is a co-author of “Take on the Street: How to Fight for Your Financial Future.”
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President Barack Obama played economist-in-chief at his news conference today, predicting that 2014 will be "a breakthrough year for America." He cited signs of improvement in housing, job creation and wages. Heck, the president said, there are almost 1 million enrollees in Obamacare now, which will help the economy grow, while also containing health-care costs.

Today's surprisingly strong gross domestic product figure -- it grew in the third quarter by a revised 4.1 percent, the fastest pace in almost two years -- underpins the president's optimism. Even the Federal Reserve seems to concur. This week, it began a long-awaited tapering of bond purchases, citing November's 7 percent unemployment figure, among other improving indicators.

But will the president's forecasting record be any better than that of the Fed, which has been wrong -- a lot -- in the last three years? Economists caution, for example, that GDP growth may slow in the fourth quarter to a 1.5 percent annual rate because third quarter output was pumped up by a lot of business-inventory building. Unemployment, moreover, is declining largely because the labor force is shrinking as the frustrated jobless stop looking for work. And while the housing market is a lot better, sales of existing homes fell 4.3 percent in November, the lowest reading since December 2012.

Perhaps Eric Rosengren, president of the Federal Reserve Bank of Boston and the lone dissenter from the Fed's taper plan, got it right. Policy makers, he told Bloomberg News today, should have waited for more evidence of economic strength rather than rely on forecasts that too often have been wrong. "We should be humble about our forecasting capabilities," Rosengren said.

Who's right? I'm taking Obama's side on this one, and not because economic indicators mostly point up. They did in years past, too -- only to sink back down again. Instead, my gut tells me that the economy will gain speed in 2014 because monetary policy and fiscal policy won't be so, well, confoundingly muddled. As of this week, they are about as predictable as they can possibly be, giving consumers and corporate executives the confidence they need to make longer-term decisions.

Fiscal drag, which weighed on growth throughout 2013, will start to ease now that Congress has adopted a budget for the first time in years. Even better, the country avoids another government shutdown for two more years because of the budget deal.

Fed Chairman Ben Bernanke added to the economic certainty this week when he made it crystal clear that the Fed won't raise interest rates even after unemployment hits the central bank's 6.5 percent threshold, possibly well into 2015. He assured us that Janet Yellen, the nominee to replace him, is on board.

Corporate managers sitting on piles of cash have run out of excuses not to hire and invest more in the new year. And that's why I think Obama's economic prediction will pan out.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Paula Dwyer at pdwyer11@bloomberg.net