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Practical Economics

Look for the Economy to Heat Up

More jobs, higher incomes are poised to fuel growth.

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The economy will rev up in coming months, accelerating the pace from its sorry start to the year, which has the nation’s gross domestic product moving ahead at a crawl.

See Also: Kiplinger's Economic Outlooks

“The slowdown is over,” says Mark Zandi, chief economist of Moody’s Analytics, in a recent statement.

The Federal Reserve, we believe, will also see slow growth this year contained to the first half of the year and, thus, will likely proceed to hike short-term interest rates by one-quarter of one percentage point in September.

Several signs point to peppier growth, but the pace may lag behind earlier forecasts. We still see GDP expanding at about a 2.6% clip for the year. But a slower showing, largely as a result of sluggishness in early months, can’t be ruled out. In fact, first-quarter GDP growth will likely be revised downward into negative territory largely because of the effects of the harsh winter weather, the strong dollar and labor strife at West Coast ports. Our early read on next year: 2.8% growth, assuming a strong dollar’s continuing drag on exports and another bout with Jack Frost to begin the year.

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Among the positive indicators:

Employers of all stripes are hiring again. Businesses both big and small will snap up workers to the tune of 200,000-plus a month through 2015. By December, the unemployment rate will fall to 5.1%, its lowest level since April 2008. It’s now at 5.4%.

Job openings are plentiful. Since autumn, they have been at their highest level in 13 years.

Wages will keep creeping up as employers loosen the purse strings to retain talented workers. Though higher wages pinch firms if productivity growth doesn’t keep pace, they’re a plus for the economy. Higher incomes should spell more spending by consumers going forward. Many folks have held back on making purchases, opting to use savings from lower prices at the gasoline pump to pay down debt. But more take-home pay figures to make consumers more confident about the economy.

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Rising disposable income will pour fuel into the economy. By year-end, consumer outlays will be 3.7% higher than the year before for cars, home furnishings and more. Business spending will climb, too. Expect 4% growth over 2014, hindered a bit by pullbacks by energy firms that took root as oil prices spiraled downward.

And housing will continue to gain steam – an important component of economic growth that ripples through many parts of the economy. Housing starts surged in April, finally freed from the constraints of cold weather and snow.

But note that the strong dollar relative to many other currencies—which means that U.S. goods and services sold abroad are pricier than those of foreign competitors—will hold exports this year to more modest gains—up a scant 2%. Imports, however, will surge at more than twice that rate—around 5%—as the beefier buck makes a variety of goods cheaper for U.S. consumers. The widening gap in trade will subtract more from GDP in 2015 than in 2014.

As for government spending, it won’t add much to overall economic activity. Many local and state governments are maintaining a tight lid on expenditures.