The year 2013 was another disappointment for the U.S. economy. Real GDP grew only 1.8% from the 3rd quarter of 2012 to the 3rd quarter of 2013. At the beginning of December, however, came three bits of news that might justify a little optimism for 2014. Real GDP grew at a 3.6% annual rate in the 3rd quarter, the unemployment rate dropped to 7%, the lowest rate in five years, and consumer expectations improved. Has the economy turned the corner? Will the recovery finally take off?

Household consumption spending is key. Real consumption grew slowly in 2013, only 1.8%. Home values are rising and debt burdens are falling, which may give consumers reason to spend more. If the labor market begins to recover, another factor inhibiting consumption would fade. And maybe consumers are thinking that way. The University of Michigan’s index of consumer sentiment jumped in December. More consumer spending would give businesses a reason to produce, hire and invest. Good News! Housing construction was the fastest growing component of GDP in 2013, rising almost 15%. Homes for sale are still in short supply, and housing starts are still well below normal levels. Mortgage rate increases could slow this growth, but it seems more likely that housing investment will continue to expand rapidly.

Business investment has been growing more slowly, only 3.2% in 2013. Orders for capital goods, which is a leading indicator of investment, have been pointing to continued slow growth. Higher corporate bond interest rates could also inhibit business investment. But happy consumers make better customers, so business may find reasons to nudge investment growth upward. More Good News!

Fiscal policy has been the biggest drag on growth and biggest threat to recovery. Federal purchases have fallen 6.5% in 2013 as a result of the sequester. Taxes rose at the beginning of the year, which discouraged consumers. The uncertainty over the debt ceiling has also affected willingness to lend and spend. There now appears to be hope that Congress will avoid such disasters in 2014, so fiscal policy can move from reverse to neutral. One hopes as well that the Affordable Care Act will begin working more smoothly, to give businesses a better idea of future health costs. That would help confidence.

The budget deficit has fallen faster than usual given the slow growth of the economy. Ordinarily lower government borrowing might reduce interest rates and encourage investment. But interest rates are already near record lows, so lower Federal spending has not been offset by higher investment spending.

Exports also grew slowly in 2013, by 2.8%. The International Monetary Fund is projecting somewhat slower growth for the rest of the world in 2014, so there is little prospect for a boost in exports. Import spending tends to rise faster than consumption spending, so the trade deficit will probably rise. That would make trade a slightly negative factor for 2014 growth.

Overall, more rapid consumption growth, continued increases in housing construction, and a move of fiscal policy to neutral should cause output to rise more rapidly in 2014. I put the growth rate at 2.8%.

The unemployment rate has been falling more rapidly than expected, given the slow growth in GDP. It began the year at 7.8% and hit 7.0% in November. Slow labor force growth means the unemployment rate can fall even with sluggish job creation. As the labor market improves discouraged workers may return to the labor force, so the unemployment rate may not fall faster with improved growth. Expect the unemployment rate to be 6.3% by this time next year.

The Federal Reserve accidently caused an increase in interest rates over the summer, by suggesting that someday they would need to reduce monetary stimulus. That day may come in 2014. “Tapering” of bond purchases will probably begin in the first half of the year. The federal funds interest rate—the main indicator of Fed policy—has been near zero since the end of 2008. The Fed has said that this rate will not be raised until the unemployment rate drops below 6.5%. That’s likely to happen in 2014. Expect a small increase in the federal funds rate by the end of the year. This should cause a small rise in the short term Treasury bill rate, to about 0.5%, and a rise in the long term Treasury bond rate, to 3.0%.

Inflation is under control, despite the huge increases in money that the Fed has engineered since 2007. The all-items inflation rate was 0.9% for 2013, and the “core” rate, not including food and energy, was 1.7%. Both these rates are below the Fed’s 2% target. The unemployment rate will fall, but there is still excess capacity in the economy. Small reductions in energy prices will also hold inflation down. Expect the all-items inflation rate to be 1.5% in 2013.

Look for growth a little higher, falling unemployment and inflation under control. Barring policy blunders from Congress, the U.S. economy just might have a pretty good year in 2014 and that would be GOOD NEWS!