2014: A Year in (Economic) Review

2014 was an interesting and transformational year for the United States economy. Now that the year has come to a close, it is important to take a look back on the past twelve months to keep track of our economic progress. 2014 saw a brief economic contraction in the first quarter, the end of the Federal Reserve's third quantitative easing program, and a changing of the guard at the head of the Federal Reserve. Taking a comparative look at the reaction to the first quarter's GDP report and the anticipated fourth quarter GDP report can show the metamorphic story of the US economy last year.

When Chair Yellen took office in the beginning of 2014, the economy was in the midst of only the second economic contraction since the end of the Great Recession. A CNBC article and accompanying video highlight the reaction to the first estimate of US Gross Domestic Product in the first quarter. While the final estimate of Real GDP growth was only revised downward (twice) to -2.9% from the 0.1% growth initially reported, the reaction to the weak data nevertheless holds. In the video, CNBC reporter Rick Santelli offers his reaction: "so to summarize: weak. Let me summarize again: weak." The article goes on to further discuss the "weak" initial report saying:

While the harsh weather could partially explain the weakness in growth, the magnitude of the slowdown could complicate the U.S. central bank's message as it is set to announce a further reduction in the amount of money it is pumping into the economy through monthly bond purchases.

The added backdrop to this initial reaction is that, as I said before, the final number came in significantly worse than what was originally reported. If this number had been reported to begin with, I would have been curious to see if there would have been greater questioning within the Fed about the speed of their tapering plan. I would have expected that Chair Yellen, who is considered to be an monetary "dove", may have pushed for an ease of the tapering plan.

The first quarter GDP report stands in stark contrast to how the United States economy finished the year. Third estimate of the third quarter Real GDP growth currently stands at 5.0% growth, and this strong growth is expected to continue at a slightly slower pace in the fourth quarter and into 2015. In a recent publication by the International Monetary Fund, the United States economy's growth rate was revised upwards while most other developed areas were revised downwards. The IMF explains:

For 2015, the U.S. economic growth has been revised up to 3.6 percent, largely due to more robust private domestic demand. Cheaper oil is boosting real incomes and consumer sentiment, and there is continued support from accommodative monetary policy, despite the projected gradual rise in interest rates.

This report of expected healthy economic growth for the United States stands in direct contrast with the beginning of 2014. An economy that could only be described by the word "weak" now appears to be one of the healthiest economies in the developed world. It now appears the Fed was correct to continue its course of tapering, and are now even expected to begin to normalize their monetary policy.