“For at least the past year, the economy should have been able to achieve growth close to, perhaps above, its long-run potential of 2.5 to 3 percent. Yet growth remains stuck in a sub- 2-percent rut,” observes Bill Witte, associate professor emeritus of economics at IU and a member of the panel that presented the school’s annual forecast. “We can find only one plausible explanation: Policy from Washington is standing in the way all across the board. Fiscal policy is obviously a mess. The latest episode managed to kick that mess into , but only after shutting down much of the government for two weeks.”
The Federal Reserve continues a policy stance that is “totally unsustainable,” Witte believes, and it has devised no true plan for how or when to change course. “All of this,” he adds, “has created great uncertainty for consumers and greater uncertainty for business.”
While panel members expect growth in the first half of 2014 to hover at the “unacceptably slow” rate of about 2 percent, the growth rate could rise toward 3 percent if the policy deadlock in Washington eases and if the Federal Reserve tapers down its purchases of securities without disrupting financial markets.
The starting point for the panel’s forecast is an econometric model of the United States, developed by IU’s Center for Econometric Model Research, which analyzes numerous statistics to develop a national forecast for the coming year.