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CHICAGO, IL--(Marketwired - Nov 13, 2013) - The fiscal challenges that dragged on much of 2013, from government cutbacks to consumer debt, are expected to abate next year and open the doors for GDP to continue revving up, according to a new report from BMO Economics.

"We'll start to see state and local governmen ts increase spending in 2014, growing their workforce and investing in infrastructure projects that have long been on the backburner," said Michael Gregory, Deputy Chief Economist and Head of U.S. Economics, BMO Capital Markets. "Household finances are in much better shape too, with household debt down by more than a trillion dollars, and climbing home and equity prices creating a wealthier consumer base."

These factors are supported by a strong appetite for auto replacements and pent-up demand in the housing market which, while on the upswing, is still seeing affordable prices.

An Energy Boost

The shale gas industry shows consistent high growth, and is generating significant investments across several states. The result is a reduction in oil imports and the overall U.S. trade deficit, with the U.S. now overtaking Russia as the top producer globally for oil and natural gas.

Slow(er) Finish, Strong Start

"While October job numbers were impressive, we still expect that the government shutdown will have an impact on the overall quarter. We also have to factor in the significant amount of inventory that businesses produced but didn't sell in Q3. As a result, Q4 GDP will be closer to 2 percent," said Mr. Gregory.

Growth in Q1 is expected to rebound, however, as long as lawmakers in Washington settle on a budget deal in the coming weeks. BMO Economics believes both sides are more apt to make a deal this time around, given low public approval ratings following the standoff in October.

QE tapering in Q1

The consistent growth in the U.S. should lead the Federal Reserve to start tapering quantitative easing in early 2014.

"Improving growth quarter-over-quarter, coupled with positive job numbers, will likely lead to a reduction in QE around late January," added Mr. Gregory. "We could still see asset purchases stretch out into the second half of next year, and the Fed funds rate remain as is for at least another 24 months."