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corner, with purchases increasing during the second and third quarters of
2013. The mid-February action of Congress to suspend the debt limit until
March 2015 relaxes a situation that had been headed towards unwelcome
uncertainty.
Although the economy still remains challenging for many, households—on
average—are in an improved position to increase spending as
they have further reduced their debt burden and seen a substantial increase
in housing and stock-market wealth. More household wealth will facilitate
an increase in spending on consumer durables such as motor vehicles, which
are showing their age and due for replacement. Homebuilding, which grew
rapidly last year, is likely to continue growing on a path up to levels consistent
with the demographic forces of the next decade, with mortgage interest
rates still below their pre-recession levels, despite a mid-2013 rise. Business
fixed investment also has potential to accelerate after relatively slow growth
in 2013 as aggregate demand picks up and businesses can take advantage of
their sizeable cash flows.
Nevertheless, several downside risks to economic growth remain in
2014 as unforeseen events both domestically and internationally may pose a
risk to the economy. Recently, for example, severe cold weather and storms
in the United States and a global reduction in asset prices have contributed
to some economic activity falling below trend rates of growth in the last few
months.
The pace of the recovery will depend, in part, on policy choices.
Additional measures that increase aggregate demand would add impetus to
the economy in 2014. In particular, the Budget also includes the Opportunity,
Growth, and Security initiative, which will finance additional discretionary
investments in areas such as education, research, infrastructure, and
national security. The $56 billion initiative is evenly split between defense
and non-defense and is fully paid for with mandatory spending reforms and
tax loophole closers. In addition, investments in infrastructure or extending
emergency unemployment benefits would expand demand immediately
while measures like business tax reform would help the economy by increasing
certainty.
Key Events of 2013
Aggregate Output Growth During the Year
Growth in aggregate economic activity was fairly steady during 2013,
with quarterly growth rates between 1.8 and 3.0 percent at an annual rate
for the first three quarters of the year, as measured by the average of the
46 | Chapter 2