Economic Review 2013 – 4th Quarter

The state of the general economy can help or hinder a business’ prospects and therefore has a direct impact on the value of a business. The economic recovery following the recession of 2007-2009 continues, but modestly. Following the December 17-18, 2013, meeting of the Federal Open Market Committee (the “Committee”) of the Federal Reserve, the Committee issued a statement that economic activity appears to moderate growth in the fourth quarter of 2013. The housing sector recovery has slowed in recent months despite the increase in household spending and business fixed investment. Labor market conditions have shown further improvement; the unemployment rate has declined but remains elevated. Fiscal policy continues to constrain economic growth, although its effects are expected to diminish.

Gross Domestic Product

The U.S. Bureau of Economic Analysis (BEA) estimates that real gross domestic product (GDP) –the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 4.1 percent in the third quarter of 2013. Quarterly GDP data for the preceding ten years is shown in the following figure.

Seasonally Adjusted Annualized Rates; Shaded Bar Indicates Recession


Sources: U.S. Bureau of Economic Analysis and National Bureau of Economic Research. GDP percent change is based on chained 2005 dollars.



The employment situation in the United States remains weak. In the 25 consecutive months from February 2008 to February 2010, 8.7 million non-farm jobs (net) were lost. In the 46 consecutive months from March 2010 to December 2013, 7.6 million non-farm jobs (net) were created.1 The unemployment rate peaked at 10.0 percent in October 2009 and has abated somewhat to a still-elevated 6.7 percent as of December 2013.2 This statistic omits discouraged workers who have left the workforce and part-time workers who would prefer full-time work. A more expansive of labor underutilization was 13.1 percent as of December 2013.3 Such a high level of underemployment places severe strain on the economy as consumers are unable or hesitant to spend. The past ten years of employment data are presented in the following figure.

Shaded Bar Indicates Recession

Sources: Department of Labor, Bureau of Labor Statistics, and National Bureau of Economic Research. Data represents non-farm payrolls.

Interest Rates

The Committee meets periodically to assess economic conditions and determine appropriate policies to fulfill its dual mandate of fostering maximum employment and price stability. At its December 17-18, 2013, meeting the Committee kept the target federal funds rate at zero to 0.25 percent and anticipated that an exceptionally low federal funds rate is likely to be warranted as long as unemployment is greater than 6.5 percent and inflation expectations remain close to the Committee’s goal of 2.0 percent. The Committee also announced that beginning in January 2014, it would modestly reduce its quantitative-easing policy of purchasing mortgage-backed securities to a rate of $35 billion per month and longer-term Treasury bonds to a rate of $40 billion per month. Recent Federal Reserve communications have indicated that further reductions in bound purchases are not preset and are dependent on the evolution of the economic outlook and progress towards the Committee’s longer-term employment and inflation objectives. The Committee will continue extending the average maturity of the Treasury securities it holds and reinvesting proceeds from maturing bonds.

Uncertainty regarding the timing and severity of further reductions in accommodative monetary policy resulted in slight increases in U.S. Treasury yields from the third quarter of 2013. As a result, corporate bond yields and 30-year mortgage rates also increased slightly during the fourth quarter. Housing sector activity slowed during the period, in part reflecting the effects of increased mortgage rates. Despite this increase in interest rates, the issuance of commercial and industrial loans, automobile loans, and student loans continued to expand since September. Ten years of historical interest rate data shown in the following figure.

Shaded Bar Indicates Recession

Source: Federal Reserve Statistical Release H.15 (519) Selected Interest Rates.


Current Events

United States financial markets surged in 2013. The Standard and Poor’s 500 stock index posted its largest percentage gain since 1997, increasing 32 percent in 2013. Initial public offering volume reached its highest level since 2000; in 2013, there were 222 initial public offerings that raised aggregate proceeds of $54.9 billion.4 Despite the ongoing economic recovery in the United States, the city of Detroit filed for Chapter 9 bankruptcy on July 18, 2013. It is the largest municipal bankruptcy filling in U.S. history, with estimated total debt between $18 billion and $20 billion.5

As a result of the inability of the Republican-led House of Representatives and the Democratic-led Senate to enact regular appropriations or a continuing resolution related to government spending for the 2014 fiscal year, a partial government shutdown occurred from October 1, 2013 to October 16, 2013 (the third longest government shutdown in U.S. history). The shutdown resulted in approximately 800,000 federal employees being furloughed without pay and another 1.3 million being required to report to work without pay. On October 16, 2013, the Senate passed a continuing resolution to fund the government until January 15, 2014, and suspended the debt ceiling until February 7, 2014, thus ending both the government shutdown and the debt-ceiling crisis of 2013. Independent economic experts forecast that the government shutdown will lower fourth quarter real GDP by 0.2 to 0.6 percentage points, or between $2 billion and $6 billion in lost economic output.6

Several major provisions of the Patient Protection and Affordable Care Act take effect on January 1, 2014. These provisions include: (i) an individual mandate requiring individuals not covered by an employer-sponsored health plan, Medicaid, Medicare, or other public insurance programs to secure an approved private-insurance policy; (ii) the establishment of state-based health insurance exchanges, which are regulated, online marketplaces, administered by either federal or state government, where individuals and small business can purchase private insurance plans; and (iii) the requirement of guaranteed issue insurance policies that prevent insurers from denying coverage to individuals due to pre-existing conditions. Initial implementation of the healthcare exchanges has received mostly negative reaction from the general public., the government website that allows people to apply for insurance on the exchanges, has suffered from sustained software defects since the initial October 2013 launch. Protection and Affordable Care Act remains uncertain.

The European sovereign debt crisis that began in earnest with Greece in 2010 and the subsequent recession continue to adversely affect local economies and employment levels. Although the proximate cause was the 2007-2009 financial crisis, a combination of persistent structural deficits, trade imbalances, and real estate bubbles in the decade prior have resulted in a series of European nations requiring substantial financial bailouts. A “troika” of international lenders consisting of the European Union, the European Central Bank, and the International Monetary Fund has provided extraordinary financial support to five of seventeen euro area countries: Greece (April 2010), Ireland (November 2010), Portugal (May 2011), Spain (June 2012), and Cyprus (June 2012). The unemployment rate in the European Union was 10.7 percent as of December 2013, falling slightly from the May 2013 record-high of 11.0 percent.


In recent months, various statistical reporting agencies have revised the U.S. economy’s projected growth rate downward due to tighter financial conditions and uncertainty regarding the ability of American and European governments to enact policies that will stabilize debt levels while supporting economic growth. In December, the Federal Reserve widened its projected range of near-term GDP growth from its September forecast and narrowed its projected range of GDP growth for both 2015 and 2016. This data is presented in the following figure.


Source: Federal Reserve.


The Congressional Budget Office’s (CBO) May 2013 report estimated that the federal budget deficit for fiscal 2013, which ended September 30, would be $642 billion, the lowest level since 2008; the actual federal budget deficit for fiscal 2013 was $680 billion.7 The CBO projected subdued economic growth in 2013, reflecting the sharp increase in federal taxes and the reduction in federal spending that had already begun or were scheduled to occur under current law.8 The CBO estimates that real GDP will grow 3.4 percent in 2014, with growth averaging 3.6 percent from 2015-2018. GDP is expected to remain below the economy’s potential until 2017.9

Inflation, as measured by the Core Consumer Price Index, which excludes the effects of food and oil, is forecast to be 1.5 percent in 2013, eventually increasing to an average of 2.0 percent per year in the 2019-2023 period.10 In July 2013, Moody’s Investor Service upgraded the United States’ credit rating outlook from “negative” to “stable” due to improving labor and housing markets and strong stock market performance. Although the global economy continues to recover from the severe recessionary shocks which began in 2007, the process has been slow and unsteady, and consumers, businesses, and investors remain cautious.


1    Source: Bureau of Labor Statistics. “Employment, Hours, and Earnings from the Current Employment Statistics survey (National).”

2    Source: Bureau of Labor Statistics. “U-3 total unemployed, as a percent of the civilian workforce (official unemployment rate)”. Reported on a seasonally adjusted basis.

   Ibid. “U-6 total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force.” Reported on a seasonally adjusted basis.

   Source: Renaissance Capital LLC. “Renaissance Capital U.S. IPO Stats – IPO Proceeds.” January 2014. Accessed on 10 January 2014.

5    Davey, Monica; Walsh, Mary Williams (July 18, 2013). “Billions in Debt, Detroit Tumbles Into Insolvency”. The New York Times. Accessed on 10 January 2014.

6    “Impacts and Costs of the October 2013 Federal Government Shutdown.” The White House Office of Management and Budget, November 2013. Accessed on 8 January 2014.

7    U.S. CBO. “How the Actual Federal Budget Results for 2013 Compared With CBO’s May 2013 Estimates.” November 2013.

   U.S. CBO. “Updated Budget Projections: Fiscal Years 2013-2023.” May 2013.

   U.S. CBO. “An Update to the Budget and Economic Outlook: Fiscal Years 2013-2023.” February 2013.

10   Ibid.