What can we expect for 2014?
David Rosenberg, chief economist at Gluskin Sheff, is one of the most widely-followed and respected economists today. He offers his three predictions on the economy in general and on the markets specifically to Talking Numbers.
David Rosenberg's 2014 Predictions
1. Wage inflation
Rosenberg says: "We're in the early stages of the bargaining power shifting from employers to employees. I think that the labor market is going to continue to tighten. And, as it does, we're going to get a wage response. I get a sense this has already started happening in the past few months. But to me, one of the big surprises for 2014 is going to be that we're going to get some organic wage growth that will help underpin consumer spending."
2. Higher bond yields
Rosenberg says: "By the end of the year, the 10-year note yield will probably up to around 3.5%. But, I think from a bigger picture standpoint…, the secular 30-year bull market in Treasuries ended in July 2012. We did a classic technical retest – a failed retest – of those yield lows last spring. My sense is that the trend in bond yields irregularly will move higher I think by the end of the cycle. In the next couple of years, we'll be talking more like 5% Treasury note yields as opposed to even 3%. So, what's happened in the past, say, nine to 12 months is just the first installment of what is going to be further increases in long-term rates down the road."
3. Cap-ex cycling starting
Rosenberg says: "This is one of those bitter ironies where you tell somebody that productivity growth in the United States has slowed to 0%, which is what it's done. It's probably the only late-cycle statistic I can really point to with the fact that, here we are in mid-cycle and productivity growth has wound down to zero. I don't think that's sustainable. I don't think the corporate sector is going to allow that to continue because there's a lagged relationship between productivity growth rates and profit margins. I think CEOs will do everything they can to protect those profit margins.
"The decline of productivity growth to the extent now that it's vanished is going to spur on the corporate sector to do something they haven't done this cycle, which is to rebuild the capital stock. What doesn't get mentioned too often is that, when you take a look at the past five years, growth in real capital spending in the business sector has barely been up at a 1% annual rate. We have not gone through a five year period where growth in the real private sector capital stock has been so anemic at any time in the past six decade.
"It's interesting that the corporate sector certainly had the money in the balance sheet to buy back their stock or to pay out dividends to shareholders. But, what's happened is that they have not yet invested organically in their businesses and the byproduct of that has been that productivity growth has been whittled down to next-to-nothing…. I think one of the surprises of the upcoming year is going to be that capital spending is going to accelerate."
To hear the rest of Rosenberg's outlook for 2014 – including what he thinks the yield curve will mean for the markets this year – watch the video above.
More from Talking Numbers: