As we enter 2014, two sets of forces should lead to stronger economic growth: less fiscal drag and reduced uncertainty. The “fiscal cliff”, which the U.S. faced at the beginning of 2013, led to a combination of tax increases and spending reductions by the federal government that reduced 2013 GDP by an estimated 1.5%. Strong growth in the private sector offset this decline and led to the moderate 2.0% expansion of 2013.
While there will be further fiscal drag in 2014, as the sequestration process continues, it will not be as significant as last year. More importantly, the uncertainty that has surrounded fiscal policy for the past two-and-a-half years is diminishing. We do not anticipate any significant shifts away from current policy, but as the budget debate becomes less of an obstacle, uncertainty will diminish. This should lead to higher levels of confidence for both businesses and consumers.