Strategist: Get ready for steady economic growth

Next year will be so prosperous that some companies will be caught flat-footed with too little capacity to take advantage of it. Stock markets will move ahead forcefully, too.

That’s the view of Fifth Third Bank Chief Economic & Market Strategist John Augustine, who spoke at IBJ’s 2014 Economic Forecast breakfast on Wednesday morning.

In his remarks and in a separate interview, Augustine predicted the economy will grow 2.5 percent next year—the fastest since 2007. While by no means hot, the pace nonetheless will be significantly faster than this year’s.

“Business is doing very well in this country,” he said. “There is a growing belief that this economic expansion, as slow as it is, can last another three or four” years.

It’s understandable why people lack enthusiasm, Augustine said. Joblessness is still high and the nation’s capital has produced a steady drumbeat of conflict.

But strip away the emotions to focus on the facts, and the picture looks fairly bright, he said.

Businesses and consumers will continue to spend more, and exports will grow, he said. Moreover, government will ease away from its cost-cutting focus, which will pump more money into the economy.

Augustine pointed out that surveys of economists by Bloomberg, the International Monetary Fund and the Federal Reserve bank suggest this year’s anticipated 1.6-percent growth in the real gross domestic product will accelerate to 2.6 percent next year and 3 percent in 2015.

Profits of Standard & Poor’s 500 companies, up 5 percent this year, might rise as much as 10 percent in 2014, he said. The strength will spill into even higher stock prices.

Also contrary to much of the prevailing wisdom, the partisan and ideological rancor in Washington, D.C., hasn’t been entirely negative: The deficit and debt have shrunk thanks to the sequester, and there has been no recession.

“They did what we asked,” Augustine said. “Washington should be congratulating itself.”

Indiana’s economy is trending better than the U.S., but unemployment remains stubbornly high and job growth is concentrated largely in the Indianapolis area, he said. Indiana also lags in the long-term trend of bringing younger people into the work force to replace baby boomers.

A few things need to happen for the economy to improve markedly, Augustine said.

— Political middle ground must emerge in Washington.

— More sectors of the economy need to participate in the prosperity. Currently, most of the action is concentrated in housing, automotive, aerospace and energy.

— Business and consumer confidence must improve in order to spark more spending, particularly among businesses.

Economy watchers also will be scrutinizing the Federal Reserve for signals of when it might begin raising interest rates, Augustine said. The Fed held off this year to avoid dampening the housing market and hurting the economy at a time when the sequester was pulling money out of the economy.