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Tool | October 2015

Kiplinger's Economic Outlooks

2.7% in second-half '15; 2.5% for the year
Falling to 5% by year-end
Interest rates
By end '15, 10-year T-notes at 2.3%; mortgages, 4.1%
2.3% for '16, up from 1.5% in '15
Business spending
Increasing by 4% in '15
Crude oil trading from $40 to $45/bbl. by Dec.
Single-family starts rising 12% in second half of '15
Retail sales
Up 4.5%-5% this year, excluding gasoline sales
Trade deficit
Widening by 5% in '15
Practical Economics columns
Make sense of the latest data and trends.


Last updated: August 31, 2015

By David Payne

Moderate economic growth in the U.S. will continue in the second half of 2015, but won’t match the strong 3.7% boost seen in the second quarter.

We expect GDP to grow about 2.7% over the last six months of the year, resulting in an overall pickup of 2.5% for the full year, slightly ahead of 2014’s pace. The 3.7% spurt was simply a rebound from the bad weather of the first quarter. Overall growth for the first half was 2.2%.

Strong consumer spending is playing a big role in fueling the economic resurgence, helped by strong gains in disposable income and lower gasoline prices. Also helping: A ramp-up of construction activity, including home building. The housing market is having a good year, propelled by a stronger job market and rising wages plus pent-up demand and an increase in household formations.

Third-quarter growth should slow from the strong second quarter as inventories and state and local government construction slow from an unsustainable pace. Growth is likely to pick up again in the fourth quarter.

The biggest drag on U.S. growth going forward? International trade. Exports are discouraged and imports encouraged by the strong U.S. dollar, and by the strength of the U.S. economy relative to other nation’s economies. The slowdown in China will be a drag on U.S. exports, both to China itself and to its suppliers, such as South Korea and Japan. However, international trade is not likely to shave the U.S. growth rate by more than a few tenths of a percent.

Dept. of Commerce: GDP Data

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Last updated: October 5, 2015

By David Payne

Poor jobs reports in August and September will likely delay the Federal Reserve’s first rate hike in recent years until December. The 142,000 jobs added in September and 136,000 in August were far below the average of 214,000 monthly jobs logged from January to July of this year, raising questions about the possibility of an economic slowdown. While we think job growth will bounce back this fall to at least 200,000, declining exports and low energy prices are hurting employment in manufacturing and mining.

Hiring in food, metals, machinery and semiconductors was down, most likely related to a decline in exports tied to the economic slowdown in China and other emerging markets.

There is less slack in the labor market, which sets the stage for wage increases later. The unemployment rate stayed at 5.1%, close to the level the Fed defines as being consistent with full employment. A broader measure of slack in the labor market adds discouraged workers who are out of the labor force and part-time workers who want to work full-time. This measure declined to 10% in September, still above its 8% low in 2007 but far below its recession peak of 17%.

Wage pressure is building, but very slowly. Average hourly earnings grew 2.2% over the past 12 months. Wage growth is likely to continue to be slow until the labor market tightens further. Look for a more noticeable pickup in 2016.

Dept. of Labor: Employment Data

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Interest Rates

Last updated: September 4, 2015

By David Payne

Long-term interest rates should end the year at about 2.3%, just a bit above where they are now. They will get a slight bump up when the Federal Reserve raises short-term rates in the next month or two — the first increase since the recession. And 30-year fixed rate mortgages will wind up at 4.1% at the end of this year, versus 3.9% now.

Long-term rates will stay relatively low because U.S. Treasuries will continue to be attractive, given that:

● China’s growth is likely to continue slowing, keeping its central bank committed to easier monetary policy.

● The Fed won’t want to further boost the value of the dollar by making it even more attractive with higher rates.

● Uncertainties about Greece staying in the eurozone will persist well into 2016. Every hiccup will push more investors toward the safety of bonds from major economies.

● Consumer prices in the U.S. are unlikely to rev up much anytime soon.

● The European Central Bank will stay on its expansionary path despite improving growth in Europe. The ECB intends to keep buying 60 billion euros’ worth of bonds a month until September 2016, a substantial share of the Eurobond market.

We expect the Federal Reserve to bump up short-term interest rates by a quarter-point at either their October 28 meeting or their December 16 meeting. But we don’t see a second hike until several months later. Federal Reserve Chair Janet Yellen has indicated that increases are not going to happen at every meeting, as they did under former Fed Chairman Alan Greenspan between 2004 and 2006. She wants to be able to assess the effect of each hike before OK’ing the next one.

Federal Open Market Committee

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Last updated: September 23, 2015

By David Payne

Expect overall inflation of 2.3% by the end of 2016, after a mere 1.5% rise this year. Bringing inflation back to more normal levels: the end of declines in gasoline and energy prices next year. Recovery in those prices is likely to be small, perhaps only 3%, but enough to push inflation above 2%.

The core inflation rate, which excludes food and energy prices, will also be up about 2.3% in 2016, versus a 2.1% hike in 2015. The Federal Reserve considers the core rate a more reliable indicator of future inflation than the overall index. The increase next year will be roughly in line with an expected pickup in wage growth to 2.5% next year.

Look for food prices to grow by about 2%, double the pace in 2015. Food prices this year were affected by worldwide declines in commodity prices, despite shortages that led to strong price growth for such items as eggs.

A strong rental housing market will keep rents rising at a brisk pace of better than 4%, and overall shelter costs climbing by 3.6%. The increase in medical care costs will be moderate at 2.5%, helped by a slowing of prescription drug price increases, from 4.5% in 2015 to 3.5% in 2016.

Other areas where price pressures are likely to develop: Day care costs will rise 4% as more folks get jobs. College tuition will rise about 3.5%, outstripping inflation, as usual. Airline fares are likely to bump up a bit as fuel costs stop falling.

But sectors dominated by imports, such as appliances and home furnishings, are likely to see very little price inflation next year, as the relatively high value of the dollar keeps the cost of imports low.

Dept. of Labor: Inflation Data

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Business Spending

Last updated: September 25, 2015

By Glenn Somerville

We still anticipate a modest 4% rise in overall business spending this year. Auto manufacturing and the housing industry, in particular, will generate an increase in capital investment in the fourth quarter and into 2016.

No return to prerecession days, however, when double-digit increases in annual spending on new plant and equipment were common. Broader spending increases are largely being held back by the slump in energy exploration and development. Construction and mining giant Caterpillar Inc., for example, says it is laying off 10,000 employees because of slowing sales to customers affected by low oil prices. Meanwhile, the relatively weak global economy and strong dollar are restraining exports.

Capital goods orders excluding military wares and aircraft — a proxy for business spending plans — eased down fractionally in August by 0.2%. The slight pullback came on the heels of two successive months of hefty gains. Most of the drop occurred in orders for transportation goods, including new commercial aircraft and motor vehicles and parts. But there’s reason to expect at least a moderate improvement during the rest of the year and beyond, given that Boeing just picked up a $38-billion order from China for 300 new aircraft.

Come 2016, an improved pace of global economic growth should give corporations more encouragement to invest for expansion.

Census Bureau: Durable Goods Report
Census Bureau: Business Inventories
Census Bureau: Construction Activity


Last updated: October 2, 2015

By Jim Patterson

Get ready for cheaper gas. After holding largely steady this week, prices at the pump look poised to resume the descent they started this summer. The national average price of regular unleaded, now $2.29 per gallon, is headed for $2.20 or lower in coming weeks. Diesel should also drift down, though not by as much as gasoline. Now averaging $2.49 per gallon, we see diesel retreating to about $2.45.

Oil prices remain stuck in a rut, with benchmark West Texas Intermediate (WTI) holding steady near $45 per barrel. We look for oil markets to remain volatile but continue to expect WTI to trade between $40 and $45 by the time December arrives. Meanwhile, gasoline futures contracts are falling on signs of weaker gas demand, setting the stage for lower retail prices.

Even natural gas prices are under downward pressure. At $2.44 per million British thermal units, the benchmark gas price has slipped below our expected trading range of $2.60 to $2.90. Supplies of gas in underground storage jumped this week on lower demand, setting off a price slide. But we think the downturn will be brief, and that gas will move modestly higher within a few weeks as cooler weather ramps up heating demand.

Dept. of Energy: Price Statistics

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Last updated: October 5, 2015

By Rodrigo Sermeño

Housing fundamentals continue to improve. Buyer traffic and showings of existing homes continue at high levels, while traffic for new homes shows a moderate but upward climb. Inventories of both existing and new homes remain tight, with days on the market still at low levels. Gains in employment and a larger number of new household formations as millennials reach prime home-buying years are providing the foundation for continued improvement in the market.

We expect sales to continue their steady pace because of the robust demand for housing. Despite slipping in August after three consecutive months of gains, sales of existing homes remain strong and have risen year over year for 11 straight months. Sales of new homes reached their highest level since early 2008 in August.

Interest rate increases shouldn’t slow housing down for a while. Though the Federal Reserve is expected to raise rates, it should happen gradually. Expect 30-year fixed mortgage rates around 4.6% by the end of 2016 and the 15-year rate around 3.8%. The slow hikes may actually increase housing activity in much of the country as would-be buyers start looking before rates go up more.

The main threats to U.S. economic growth--slowing exports and low commodity prices--should not be a drag on housing, except for local markets that are heavily dependent on either manufacturing or energy production.

High numbers of underwater homeowners are hindering move-up activity in certain markets. According to Zillow research, underwater homeowners owing more than they can sell their homes for make up a large share of homeowners in the Las Vegas, Chicago and Atlanta metro areas. Condo owners and low-value, single-family owners are most likely to be underwater in these areas and in Orlando, Fla., Detroit, Kansas City, Mo., Cleveland and St. Louis. These owners, along with first-time buyers, are the groups needed to create a trickle-up effect of home selling to boost the entire market.

Despite a drop in housing starts in August, we expect sustained strength in the residential construction sector. Building seems to be picking up after the harsh winter delayed many projects across the nation at the beginning of 2015. Total building permits, a bellwether for future construction, rose 3.5% to an annual rate of 1.17 million in August. Permits for single-family homes rose to 699,000, the highest level since early 2008.

Dept. of Commerce: New-Home Sales
National Assn. of Realtors: Existing-Home Sales
Dept. of Commerce: Housing Starts

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Last updated: September 18, 2015

By Lisa Elaine Babb

After a bumpy start to the year, retail and restaurant sales continue to post healthy gains, a sign that consumers are feeling better about the economy. Thanks to an improving jobs market, low gas prices and strong household balance sheets, folks are ramping up their spending with enough momentum to support solid growth through the holiday shopping season. That’s good news for the broader economy, since consumer spending accounts for 70% of U.S. GDP. Excluding gasoline, retail sales will grow by 4.5% to 5% in 2015, compared to 4.7% in 2014.

Motor vehicle, restaurant and online sales will continue to perform well for the rest of the year. However, because many shoppers are spending more on big-ticket items such as cars and trucks, other non-gas sales will grow by a more moderate 3% or so. And low fuel prices will cause gas sales in dollar terms to depress the headline retail sales growth for 2015 to around only 2.5%.

August sales increased modestly after a sharp jump in July. Shoppers shelled out more on autos, clothes and dining out. Sales for retailers and restaurateurs were up 0.2% from July and 2.2% compared to last year. Core retail sales — which exclude gas, vehicles, building materials and food, due to their volatility — rose 0.4%.

But August wasn’t kind to department stores, which posted another month of poor readings. Many of the chains have been slow to adapt to changes in the industry, losing out to discount and local stores, as well as online retailers. In trying to appeal to such a broad consumer base, department stores are being outcompeted by specialty stores on quality, price or selection.

Dept. of Commerce: Retail Data

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Last updated: October 8, 2015

By Glenn Somerville

A solid economy and strong dollar make the U.S. an attractive market for the rest of the world, spelling a rising trade deficit.

Foreign firms are shipping everything they can to U.S. shores. At the same time, the higher-valued dollar — up about 13.5% in the past year against a basket of currencies of key trade partners, including Europe, Japan and Canada — is causing pain for American exporters. “Made in USA” translates to “expensive” for overseas buyers. Moreover, China’s growth is slowing, while European growth remains sluggish. Further, with Canada just now emerging from a light recession, the market north of the border is nothing to write home about, either.

Net: Trade is not a bright spot for the U.S. economy this year and likely won’t be well into next year as well.

We’re on track for about a 5% widening in the shortfall between exports and imports, to $535 billion this year. Next year, we expect China’s momentum to slow further, with Europe and much of the rest of the world expanding more slowly than the U.S. In addition, the Federal Reserve is sure to hike interest rates, likely starting later this year and continuing gradually through 2016, further buoying the value of the greenback as investors seek better returns in dollar-denominated assets.

The impact of a costlier dollar was evident in the 15.6% leap in August’s trade deficit to $48.3 billion. Exports dropped in volume by 2% to $185.1 billion. In dollar terms, that represented a $2.2-billion nosedive in foreign sales of industrial supplies and materials from July levels, $499 million less in overseas business in autos and parts, and a $571-million plunge in consumer goods exports.

Imports climbed by 1.2% in August to a five-month high of $233.4 billion. Some of that increase may have been a one-off phenomenon: Imports of consumer goods jumped by $4 billion, but $2.2 billion of that was cell phones and other household items. The surge in cell phone imports came just ahead of the release of Apple’s new iPhone model — touted as “designed by Apple in California” but made in China. Imports of toys and apparel made up most of the rest of the import increase, an indication that U.S. businesses are preparing for seasonal holiday sales and colder weather.

Meanwhile, petroleum imports in August dropped $2 billion from July to $15.1 billion, the lowest level since September 2004. The U.S. still has a deficit on oil trade but it’s shrinking, down to $6.9 billion in August from $8.1 billion in July. It will keep falling as reliance on Middle Eastern oil declines and domestic producers extract more oil and gas from U.S. fields.

Look for Washington to further ease U.S. restrictions on oil exports over the next year or so, and by the end of the decade, for the U.S. to become a net exporter of oil to the rest of the world.

Dept. of Commerce: Trade Data

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