Economic Review 2014 – 3rd 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 September 16-17, 2014, meeting of the Federal Open Market Committee (the “Committee”) of the Federal Reserve, the Committee issued a statement that economic activity expanded at a moderate pace in the third quarter of 2014. The housing sector recovery remains slow despite relatively low mortgage rates, rising home prices, and increases in household spending and business fixed investment. The unemployment rate decreased from 6.1 percent in June to 5.9 percent in September; however, the labor participation rate and the employment-to-population ratio were unchanged during the third quarter.

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 4.6 percent in the second quarter of 2014. 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 Untied 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 55 consecutive months from March 2010 to September 2014, 9.8 million non-farm jobs (net) were created.1 The unemployment rate peaked at 10.0 percent in October 2009 and has abated to 5.9 percent as of September 2014.2 This statistic, however, 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 a still-elevated 11.8 percent as of September 2014.3 Underemployment tempers economic growth 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 September 16-17, 2014, meeting the Committee kept the target federal funds rate at zero to 0.25 percent and anticipated that the federal funds rate is likely to remain exceptionally low for a considerable time after its asset purchase program ends, provided that longer-term inflation expectations remain unchanged. The first increase in the federal funds rate is expected to be in 2015. The Committee also announced that beginning in October 2014, it would further reduce its quantitative-easing policy of purchasing mortgage-backed securities to a rate of $5 billion per month and longer-term Treasury bonds to a rate of $10 billion per month. Recent Federal Reserve communications have indicated that further reductions in bond purchases are not preset and depend on economic 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.

United States financial market conditions remained supportive of growth in economic activity and employment in the third quarter of 2014. Corporate bond spreads narrowed and 30-year mortgage rates also decreased during the second quarter. Housing sector activity remains slow 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

The Standard and Poor’s 500 stock index has increased by 7.7 percent in the first nine months of 2014, and 16.4 percent in the last twelve months. Initial public offering (“IPO”) proceeds reached the highest level since the fourth quarter of 1999, totaling $37.1 billion. A large portion of these proceeds were raised from the IPO of Alibaba Group Holding Ltd, an e-commerce company headquartered in China that raised approximately $22 billion. The number of IPOs fell to the lowest level in the last five quarters (59 IPOs); however, there have been 206 offerings in 2014 year-to-date, which represents a 36 percent increase from 2013.4

Open enrollment in the Health Insurance Marketplace began on October 1, 2013, and ended on March 31, 2014, as part of the Patient Protection and Affordable Care Act. The initial launch of the healthcare exchanges was plagued by sustained software defects with the government website,, where individuals and small businesses can buy health benefit plans. 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 a result of the Patient Protection and Affordable Care Act, 7.3 million people have signed up for healthcare coverage through the Health Insurance Marketplace. As of the end of the third quarter of 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 has abated, although its effects 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 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. The unemployment rate in the European Union decreased from the May 2013 record-high of 11.0 percent to 10.1 percent in August 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 September, the Federal Reserve again lowered its projected range of near-term and longer-term GDP growth from its June forecast. This data is presented in the following figure.


Source: Federal Reserve.

The U.S. Department of Treasury’s September 2014 Monthly Treasury Statement of Receipts and Outlays of the United States Government states that the federal budget deficit for fiscal year 2014 was $483 billion, a decrease of 29.0 percent from $680 billion in fiscal year 2013.5 The Congressional Budget Office’s (CBO) February 2014 report expects that further growth in housing construction and business investment will raise output and employment and, therefore, increase consumer spending.6 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.7

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

  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   Renaissance Capital LLC, “U.S. IPO Market 2Q14 Quarterly Review,” October 2014,

5   U.S. Department of Treasury, “September 2014 Monthly Treasury Statement of Receipts and Outlays of the United States Government.” October 2014.

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

7   Ibid.

8   Ibid.