Economic Review 2014 – 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 at a moderate pace. Following the December 16-17, 2014, meeting of the Federal Open Market Committee (the “Committee”) of the Federal Reserve, the Committee issued a statement that economic activity is expanding, with gains in employment, household spending, and business investment. The unemployment rate decreased from 5.7 percent in October to 5.6 percent in December and the labor participation rate and the employment-to-population ratio increased slightly during the fourth 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 5.0 percent in the third 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 United States is improving. In the 25 consecutive months from February 2008 to February 2010, 8.7 million non-farm jobs (net) were lost. In the 58 consecutive months from March 2010 to December 2014, 10.7 million non-farm jobs (net) were created.1 The unemployment rate peaked at 10.0 percent in October 2009 and has abated to 5.6 percent as of December 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 11.2 percent as of December 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 December 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, which ended in October, provided that longer-term inflation expectations remain unchanged. The Committee will continue its existing policy of reinvesting proceeds from maturing bonds.

United States financial markets remained supportive of economic growth and employment in the fourth quarter of 2014. Corporate bond spreads narrowed and 30-year mortgage rates also decreased during the fourth 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 robustly in the fourth quarter of 2014. 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 returned by 13.7 percent including dividends in 2014. Initial public offering (“IPO”) proceeds reached the highest level since 2000, totaling $85.3 billion in 2014, a 55 percent increase over 2013. 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. There were 275 IPOs in 2014, an increase from 222 IPOs in 2013 and the highest level since 2000. Healthcare IPOs were the largest category, with 102 IPOs (37 percent) of the total.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 signed up for healthcare coverage through the Health Insurance Marketplace in 2014. The Congressional Budget Office (CBO) projected that a total of 13 million people would have insurance and pay premiums through the Health Insurance Marketplace in 2015.5

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 10.0 percent in November 2014.


Various statistical reporting agencies provide estimates of the U.S. economy’s near-term and longer-term growth rates. The U.S. economy’s growth rates for 2015-2017 are generally unchanged from its September to December, as shown in the following figure.



Source: Federal Reserve.

The U.S. Department of Treasury’s December 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. For the first three months of fiscal year 2015, the federal budget deficit was $177 billion.6 The CBO’s August 2014 report expects that further growth in housing construction and business investment will raise output and employment and, therefore, increase consumer spending.7 Real GDP is projected to grow 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.8 Real GDP is expected to grow, on average, at an annual rate of 2.2 percent from 2018 through 2024.9

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 2015, 2.0 percent in 2016, 2.2 percent in 2017, and eventually increase to an average of 2.4 percent per year in the 2018-2024 period.10 Although the global economy continues to recover from the severe recessionary shocks that began in 2007, the process has been slow and unsteady.


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

2    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, “2014 U.S. IPO Annual Review,” December 2014,

5    U.S. CBO, “updated Estimates of the Effects of the Insurance Coverage Provisions of the Affordable Care Act, April 2014.” April 2014.

6    U.S. Department of Treasury, “December 2014 Monthly Treasury Statement of Receipts and Outlays of the United States Government.” January 2015.

7    U.S. CBO, “An Update to the Budget and Economic Outlook: 2014-2024.” August 2014.


9    Ibid.

10  Ibid.