Economic Review 2014 – 1st 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 March 18-19, 2014, meeting of the Federal Open Market Committee (the “Committee”) of the Federal Reserve, the Committee issued a statement that economic activity appears to have slowed in the first quarter of 2014, in part reflecting adverse weather. The housing sector recovery has slowed in recent months despite the increase in household spending and business fixed investment. Labor market conditions have been relatively stable; the March 2014 unemployment rate has been 6.7 percent for several months.

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 2.6 percent in the fourth 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 2009 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 49 consecutive months from March 2010 to March 2014, 8.3 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 March 2014.2 This statistic omits discouraged workers who have left the workforce and part-time workers who would prefer full-time work. A more expansive measure of labor underutilization was 12.7 percent as of March 2014.3 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 March 18-19, 2014, 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 April 2014, it would further reduce its quantitative-easing policy of purchasing mortgage-backed securities to a rate of $25 billion per month and longer-term Treasury bonds to a rate of $30 billion per month. Recent Federal Reserve communications have indicated that further reductions in bond 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.

Despite weaker-than-expected economic data, United States financial market conditions remained supportive of growth in economic activity and employment in the first quarter of 2014. Long-term U.S. Treasury yields slightly decreased from the fourth quarter of 2013. Corporate bond spreads narrowed and 30-year mortgage rates also decreased slightly during the first quarter. Housing sector activity has slowed despite decreased mortgage rates. The issuance of commercial and industrial loans, automobile loans, and student loans continued to expand since December. Ten years of historical interest rate data are shown in the following figure.

Shaded Bar Indicates Recession

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

Current Events

In January 2014, the Standard and Poor’s 500 stock index posted its largest monthly decline since 2012. Significant currency devaluation and volatility in emerging markets resulted in a “flight to quality,” as market participants sold risky equities and purchased safer assets such as U.S. Treasury bonds. Weaker-than-expected economic data from the U.S. and China combined with the implementation of the Federal Reserve’s tapering of bond repurchases amplified the decline in emerging markets. Despite the decline in January, U.S. financial markets rebounded in February and March 2014, led by improved financial market sentiment and strong corporate earnings.

Several major provisions of the Patient Protection and Affordable Care Act took effect on January 1, 2014. These provisions include: (i) an individual mandate requiring individuals not otherwise covered to secure an approved private-insurance policy; (ii) the establishment of state-based health insurance exchanges 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 suffered from serious and sustained software defects since the initial October 2013 launch. On February 10, 2014, the Treasury Department announced that it would postpone the implementation of the provision requiring medium-sized companies to offer health insurance to all full-time workers until 2016 (two years longer than originally anticipated). As of March 2014, the economic impact of the Patient 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 decreased from the May 2013 record-high of 11.0 percent to 10.5 percent in March 2014.


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 March, the Federal Reserve lowered its projected range of both near-term and longer-term GDP growth from its December forecast. This data is presented in the following figure.


Source: Federal Reserve.

The Congressional Budget Office’s (CBO) February 2014 report estimated that the federal budget deficit for fiscal year 2014 would be $514 billion, compared with $680 billion in 2013. The CBO expects that further growth in housing construction and business investment will raise output and employment and, therefore, increase consumer spending.4 Real GDP is projected to grow 3.1 percent in fiscal year 2014, 3.4 percent in fiscal years 2015 and 2016, and 2.7 percent in 2017. By the end of 2017, the CBO estimates that the gap between actual GDP and the economy’s potential GDP will be eliminated.5

Inflation, as measured by the Core Consumer Price Index, which excludes the effects of food and oil, is forecast to be 1.9 percent in 2014, eventually increasing to an average of 2.3 percent per year in the 2018-2024 period.6 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.

3  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.

4  U.S. CBO, “The Budget and Economic Outlook: 2014-2024.” February 2014.

5  Ibid.

6  Ibid.