January 1, 2014 Patrick Oliver-Kelley

Unemployment benefits claims fell over the month. Consumer confidence is rising. Broader economic improvement should continue. Gross domestic product could grow by 3% next year, a rate last seen in 2005. The DJII well over 16,000 would argue that the worst is behind us. Real consumer spending growth should pick up in 2014 as housing, jobs prospects and consumer mood continue gaining. Consumers and businesses will get less help from the Federal Reserve, judging by the recent announcement that the Fed is starting to scale back its monthly bond purchases and unlike 2010, the economy won’t have any temporary fiscal measures in place to promote growth. But it also looks to be a year when Congress’s fiscal policies are less of a drag on growth. During 2013, the combination of federal tax hikes and spending cuts may have subtracted about 1.5 percentage points from growth. Despite the shutdown, the economy could finish off the year with a respectable annualized growth rate of about 2.4 percent for the fourth quarter.

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All this doesn’t mean American families are suddenly on easy street. Many would-be breadwinners remain unemployed, income gains for workers remain slow, and households are under pressure to cover costs like health care and saving for retirement. But Americans have made substantial progress in lightening their debt loads, relative to their incomes, since the early-2000s borrowing boom and the recession that followed. Orders for long-lasting U.S. manufactured goods surged in November and a gauge of planned business spending on capital goods recorded its largest increase in nearly a year, pointing to sustained strength in the economy. We are coming out of the shadows of the Great Recession in many ways. Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, surged 4.5 percent. The median price of a new home hit a seven-month high in November and was more than 10 percent higher than a year earlier.


The need to cut deficits is reducing the European Union’s military ambitions. Battle Groups are fewer and farther between; it can barely muster any. Governments now share costs and pool equipment. Europe pruning and shaping is creating what ‘the Economist’ referred to as “Bonsai armies.” Germany does not want to use military force; Britain does not want to use the EU; and France is caught in the middle. European defense is maddening. There is a growing shortage of resources. Overall defense spending in Europe is about 1.5% of GDP, well below the NATO target of 2%. The Centre for European Policy Studies points out that Europe has nine kinds of fighters, and ground attack planes, compared to the US which has four. The EU sails 16 different frigates, while the US has one. Europe’s defense industry cries out for consolidation, meanwhile, the most competitive firms are in trouble. The EU sees defense firms as important providers of jobs and high end manufacturing. Meanwhile, the EU remains the first port of call when the US needs help. Collaboration works best among countries of similar outlook and ambition. Military cooperation is the obvious answer, but European countries must first agree on what they want. Right now, national forces are being hollowed out.

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