Issue of the week: Is 2014 the recovery year?

Will 2014 “be a breakout year” for the U.S. economy? asked Sudeep Reddy in WSJ.com. Economic forecasters generally think it will be. If businesses can finally “shed their caution” and plow cash into hiring new staff and investing in equipment, “a slowly improving jobs picture and rising household wealth could spark a virtuous cycle of stronger consumer spending, increased business confidence, and rising investment.” But lurking uncertainties could still turn 2014 into “another letdown.” A new standoff in Congress over the federal debt limit, for example, could put an unnecessary drag on the economy. And the Federal Reserve’s new leader, Janet Yellen, has to negotiate a difficult “path out of bond buying.” The Fed will be under the microscope as it scales back its current $75 billion–a-month quantitative easing program, a process that has the potential to “upset markets at just about every turn.”

There are other red flags, too, said Tim Mullaney in USA Today. Wage growth remains tepid, interest rates are rising, and capital investment is still stubbornly low. But I see grounds for optimism in low inflation, a pickup in hiring by state and local governments, and most importantly a surging housing market, which is “the top reason the recovery feels different this year.” The signs are promising that we’ll see a surge in new construction, and “a housing market near the high end of forecasts could generate a million new jobs, pushing unemployment down by 0.7 of a percentage point or more.”

But what if the housing recovery is just another bubble? said Peter J. Wallison in The New York Times. When housing starts were up 23 percent in November, “there was cheering all around.” But a sober look at the numbers suggests that “the bubble is beginning to grow again.” Since 2011, housing prices have risen by almost 6 percent, exceeding the increase in rental costs. That’s a telltale sign of a housing bubble, and there’s a familiar culprit: government housing policies. The last bubble formed because the government “made it possible for many people to purchase homes with very little or no money down.” Yet we’re still at it: The Federal Housing Administration still requires down payments of just 3.5 percent. Brokers, homebuilders, and their allies in Congress have blocked all efforts to tighten such policies. But “if we expect to prevent the next crisis, we have to prevent the next bubble.”

Subscribe to The Week

Escape your echo chamber. Get the facts behind the news, plus analysis from multiple perspectives.

SUBSCRIBE & SAVE

Sign up for The Week's Free Newsletters

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

Sign up

Investors should also take precautions after a bullish year on the markets, said Paul J. Lim in CNN.com. They’ve made out very well over the last five years, during which the value of the S&P 500 has more than doubled, creating stock prices that are “among the frothiest in history.” It may be time to pull back. “Both stocks and bonds are primed to deliver subpar returns,” especially now that the Fed plans to start “shutting off its spigot” in support of bond prices. With rising interest rates on the horizon, wise investors should develop “a strategy that offers some protection from a bad bear market.”