Merrill Lynch: Economy "Out of Rehab"

Note: Ethan Harris and the Merrill Lynch team has done an excellent job of forecasting the U.S. economy. Here is their outlook for 2014, from Ethan Harris at Merrill Lynch: Out of rehab. A few excerpts:

As we have been arguing for more than a year, we think 2014 is the year when the economy finally exits rehab and starts growing at a healthy 3% (4Q/4Q). In our view, the economy would have already exited rehab this year if the politicians had not hit the economy with a double dose of austerity and confidence shocks. Two keys to better growth—the housing market and the banking sector—had already shown serious signs of improvement in 2012, with solid gains in home prices and construction and a modest improvement in bank lending. ... Absent the shocks out of Washington, we believe growth this year would have been 3 to 3.5%.
...
Not only are structural headwinds fading, we expect Washington to be less shocking. While the sequester shock is not over—there is about a 0.2pp hit to GDP in 2014—the vast majority of the 2%-plus in fiscal austerity has already been absorbed into the economy. At the same time, with the election looming, we expect moderate politicians in each party to assert themselves and avoid another shutdown.
...
While some of the cyclical bounce has already happened, it is important to recognize that the US is still in the early stage of the business cycle. Business cycles don’t die of old age, they die from overexpansion and inflation. ... In our view, the auto recovery is fairly well-advanced, but there is a long way to go in other consumer durables, housing, and business investment. Even more important ... inflation seems a distant concern.
emphasis added

Harris makes several key points that I agree with (see my post from a month ago: Comment: Looking for Stronger Economic Growth in 2014). As Harris notes, the auto recovery is "well-advanced", but many other sectors of the economy (like housing) have "a long way to go". With improved balance sheets, improving housing market, the end of state and local government austerity, less Federal government austerity, 2014 should be a better year for growth.