February 2014
Budget & Economic Forecast
The U.S. economy ended 2013 on a positive note. Real GDP grew at a respectable 3.2
percent annual rate in the fourth quarter, down from a very solid 4.1 percent pace in the
third quarter. Each of the past two quarters’ data was dominated by an unusually large
jump in inventory accumulation. Private inventory growth in the third quarter was the
largest in three years, and growth in the fourth quarter edged even higher. Nonetheless,
final sales, a measure of underlying demand that excludes the impact of inventory
swings, grew a solid 2.8 percent in the fourth quarter, following an increase of 2.5
percent in the third quarter, and up from an average of 1.1 percent during the first half of
the year. That acceleration in final sales occurred despite a huge drag from reductions in
federal government spending, which subtracted nearly a full percentage point from GDP
growth in the fourth quarter as a result of the October shutdown and ongoing effects of
the spending sequester. With the recent budget agreement, most of these effects from less
federal government spending will not carry over into 2014.
Minnesota Management and Budget’s macroeconomic consultant Global Insight (GI)
expects an unusually large buildup of inventories in late 2013 to be followed up by a
sharp, though temporary, deceleration in restocking during the first half of 2014. A recent
run of disappointing economic reports on jobs, housing, and manufacturing also suggests
this year may be off to a slow start, as severe winter weather appears to have weakened
activity. As a result, first quarter real GDP growth is expected to slow to just 1.9 percent.
Nonetheless, GI believes these setbacks are only temporary, and expect stronger growth
later this year. Real final sales are forecast to rise by a solid 2.7 percent, and accelerate to
an average annual rate of 3.3 percent through end of 2015. Global Insight believes that
pick-up will be fueled by an upturn in consumer spending, improved housing and
equipment investment, and the easing of federal fiscal drag. The improved pace of
economic growth is expected to generate faster job creation, lowering the unemployment
rate to near 6 percent by the end the year.
Feb'14 Global Insight Baseline
-1%
0%
1%
2%
3%
4%
5%
Real Final Sales of Domestic Product
Annualized Q/Q Percent Change
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
2010
2011
2012
Source: U.S. Bureau of Economic Analysis (BEA), Global Insight (GI)
Real final sales grew a solid 2.8 percent in the fourth quarter of 2013, following an
increase of 2.5 percent in the third quarter, and up from an average of 1.1 percent during
the first half of the year. That positive underlying momentum during the second half of
last year sets the stage for a stronger 2014.
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2013
2014F
2015F