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Tool | January 2015

Kiplinger's Economic Outlooks

GDP
3.3% likely in '15, from 2.4% in '14
Unemployment
Falling to 5.3% by end '15
Interest rates
By end '15, 10-year T-notes at 2.5%; mortgages, 4.4%
Inflation
2% for '15; 0.9% for '14
Business spending
Increasing by 5% in '15, matching '14's growth
Energy
Crude oil trading from $70 to $75/bbl. this spring
Housing
New single-family home starts and sales up 25% in '15
Retail sales
Up 4.2% in '15; nongasoline sales up more
Trade deficit
Widening by 10% in '15
Practical Economics columns
Make sense of the latest data and trends.

GDP

Last updated: January 30, 2015

By David Payne

Fueled by stronger consumer spending, the U.S. economy will grow at a 3.3% clip this year — from 2.4% in 2014 — and will continue to expand next year.

Consumers are energized by the availability of more jobs and by lower energy prices, which are putting more money into their pockets to shell out for other goods and services. Spending by consumers in the fourth quarter of 2014 grew at the fastest rate in more than eight years. Moreover, with unemployment on the wane — further boosting perceptions of economic security — consumer confidence is at a seven-year high.

With consumers spending more, more and more businesses will increase investment in new production capacity. Housing is in a recovery mode, too, with builders expected to increase the pace of new-home construction this year. Though the Federal Reserve has more or less promised to start raising interest rates this year, most likely in the summer, we expect the hikes to be modest.

U.S. exporters, however, won’t have much to cheer about as the strong dollar and sluggish global economic expansion put a damper on sales abroad. Some U.S. manufacturers will also lose sales at home as U.S. consumers opt for cheaper imported products, especially autos and other durable goods.

Dept. of Commerce: GDP Data

More from Kiplinger: States with the Fastest Job Growth in 2014

Employment

Last updated: January 9, 2015

By David Payne

The job market should continue to be strong in 2015, perhaps beyond. Expect monthly job gains in 2015 to average 250,000 — about 3.0 million for the year, slightly above 2014’s addition of 2.95 million jobs. These gains will keep incomes and consumption fueling healthy economic growth.

In December, companies hired 252,000 more workers, with gains widespread across nearly all industries. Hiring of health care and food service workers continued at a strong pace. There was a strong jump in construction employment, too.

Look for the unemployment rate to finish this year at 5.3%. This isn’t much below the 5.6% recorded in December. One reason it won’t fall more: The strong job market is likely to entice more folks back into the labor force to try their luck. The number of those who aren’t looking but say they want to work is about 500,000 higher than before the last recession.

Meanwhile, wage growth for nonsupervisory workers is likely to bump up a small amount in 2015 to 2.4%, after running at about a 2% rate in most of the second half of 2014. These wages fell by 6 cents an hour in December, the most in over 50 years. A possible explanation is that the fall in inflation rates, along with gasoline prices, may be causing lower-than-normal cost-of-living adjustments to wages, which are normally done at the end of each year. If it is just a data blip, the dip could be reversed in January.

Dept. of Labor: Employment Data

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Interest Rates

Last updated: January 16, 2015

By David Payne

The Federal Reserve will bump up short-term rates around the middle of the year. By the end of 2015, figure on a federal funds rate of about 0.75% and a bank prime rate of 4%.

Long rates are likely to move less. Expect 10-year Treasuries to end the year around 2.5%. Though short rates depend almost completely on the federal funds rate, long rates and bond prices are affected by other factors as well. A series of dampening influences are keeping them from rising faster. Among them: a slowdown in many of the world’s other economies -- the eurozone, Russia and China -- which has investors flocking to the U.S.

The relative strength of the U.S. economy is nudging up the value of the U.S. dollar versus the euro and most other currencies, helping to hold down expectations of inflation and exerting downward pressure on rates. U.S. inflation rates show little sign of upward movement, even assuming some kind of partial rebound in gasoline prices. Long-term expectations of tame inflation are also supporting bond prices and keeping rates low.

Rates for 30-year fixed mortgages will also see a tamer rise, and should be just 4.4% at year-end. By historical standards, that’s quite low. But after the prolonged recent period of extremely low rates, the new “normal” for rates is probably lower than it has been in past decades.

Federal Open Market Committee

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Inflation

Last updated: December 22, 2014

By David Payne

Consumer prices will rise significantly faster over the 12 months of 2015, but the pickup will be deceptive. Both the higher rate of 2015 -- likely around 2% -- and the under 1% inflation rate of 2014 are due, in large part, to gasoline prices. The big slide in crude oil and gasoline prices muffled inflation in 2014. In 2015, energy prices are likely to rebound a bit but stay low compared with recent-year averages. Thus, while they won’t exert much upward pressure on consumer prices, they won’t have the same deflationary impact that the price drops had in 2014. In contrast, the upward pressure on food prices seen in 2014 should ease in 2015, leading to somewhat lower prices. Already in December 2014, meat prices appear to be heading down.

The core rate of inflation, which excludes food and energy prices, will rise by roughly the same in 2015 as it did in 2014: 1.8%. (The core rate is typically seen as a more accurate gauge of underlying inflation because the often volatile prices for food and energy are removed from the equation.) Look for shelter costs to continue to rise at about a 3% rate, faster than overall inflation, because rents -- used to calculate Consumer Price Index shelter costs -- are climbing strongly. Until housing sales improve and demand for rental units levels off, that trend will continue, probably for at least another year.

Eventually, the stronger economy will boost general inflation, but that’s not likely until 2016 or later. This should give the Federal Reserve more flexibility to manage interest rates without the markets beginning to worry that the Fed is not raising interest rates fast enough.

Dept. of Labor: Inflation Data

More from Kiplinger: Print-Ready Consumer Price Index Chart

Business Spending

Last updated: January 29, 2015

By Glenn Somerville

Capital spending normally accelerates when U.S. economic growth is strengthening, as it is in 2015, but some special factors are holding investment back. Last year was a relatively strong one, with spending up about 5% from a soft 3% gain in 2013, and hopes were high for an even stronger increase this year. But those hopes are taking a one-two punch from the dollar’s soaring value and from the steep decline in oil prices over the past six months. The combination makes it harder to sell capital goods overseas because they cost more for foreigners to buy. At the same time, demand at home for energy-related equipment is swiftly declining as companies put planned projects into mothballs. The best bet now for capital spending in 2015 is to match 2014’s 5% gain. That’s still a favorable outcome, though a retreat from just a few months ago, when it seemed likely that new investment was poised to climb by a more robust 7%.

Business sentiment is relatively strong. That’s particularly true among smaller companies; the share planning to expand is at the highest level since 2007. But it was evident in the final quarter of 2014 that a more cautious tone about capital spending was setting in — especially in oil and gas exploration and other capital-intensive sectors. That means that a return to the days of double-digit jumps in annual business spending (before the 2007-2009 recession) is years away, if it happens at all.

The manufacturing sector accounts for the greatest proportion of any increase in capital spending. Booming new-car and new-truck sales provide reason for carmakers to ramp up output and to upgrade factories. Sales of new cars and light trucks are likely to climb to about 16.5 million this year, from 16.3 million in 2014. Aircraft makers are booked for years and railroads are updating their equipment, adding locomotives and cars to transport more goods, from crude oil to chemicals. But energy exploration and production companies are slashing capital budgets because oil prices have plunged about 50% since mid-2014, to under $50 a barrel.

Orders for costly durable goods posted back-to-back declines of 3.4% in December and 2.1% in November, reflecting weak demand overseas for a wide range of capital goods and softening demand at home for equipment used in energy exploration. Capital goods orders excluding aircraft — a proxy for business spending plans — dropped for a fourth month in a row during December.

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

Energy

Last updated: January 30, 2015

By Jim Patterson

In what could be a sign that we’ve seen the low point for gasoline prices this winter, gas prices actually rose this week. The national average price of regular unleaded ticked up about a penny per gallon, to $2.05. Drivers doubtless won’t mind the slight uptick too much, given that prices are still a whopping $1.20 per gallon less than this time a year ago.

Diesel, however, continues to fall. At $2.81 per gallon, the national average is likely to slip a few cents more in coming days.

Crude oil remains under downward pressure. At about $45 per barrel, West Texas Intermediate (WTI), the U.S. oil benchmark, is off a tad from a week ago, likely because the government’s weekly supply report showed stocks of crude in storage growing yet again. But note that demand for gasoline and other refined products is strong, and supplies of gasoline in storage dropped significantly this week. This suggests that refiners or oil traders might be stockpiling extra oil now, while it’s cheap, in anticipation of higher prices to come.

Meanwhile, U.S. oil production shows signs of slowing. Over the last seven weeks, daily crude output rose by about 95,000 barrels — a significant gain, but much slower than the pace of last summer and fall. The number of rigs currently drilling for oil has fallen from a peak of about 1,600 last October to about 1,200 now, pointing to less future production, since output from wells drilled in shale formations tends to peter out quickly. Without enough new wells coming on line, U.S. production will eventually take a hit.

So, given healthy demand and slowing output, we still look for crude to rebound in coming months, taking WTI back to a range of $70 to $75 per barrel this spring. After plunging for months, WTI has traded in a narrow range of $44 to $47 per barrel in recent weeks. Barring a significant economic downturn, this range could end up being close to the bottom for oil.

Natural gas prices are also being hammered by high supplies. At $2.69 per million British thermal units (MMBtu), the benchmark price is off again from last week, despite cold weather across much of the country. U.S. gas production last week was up a staggering 12% from the same week of 2014, which is helping to keep markets well supplied. As a result, we look for prices to remain weak: They are unlikely to rise much above $3 per MMBtu this winter, unless an extended period of extra cold weather sets in.

Dept. of Energy: Price Statistics

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Housing

Last updated: January 2, 2015

By David Payne

Look for a stronger housing market in 2015. With income and employment rising, demand for housing will increase.

It’s the gradual easing of credit conditions that will break the leftover 2014 sales logjam. This easing will come from changes made by Fannie Mae and Freddie Mac. First, down payments for Fannie and Freddie qualifying mortgages have been reduced from 5% to 3% for creditworthy first-time home buyers. This by itself will not open the floodgates, as most buyers in this category could have got a loan through the Federal Housing Administration (FHA). What is important is that the change signals mortgage lenders that Fannie and Freddie rules are beginning to relax, so lenders can consider making loans to folks that previously would have been ruled out automatically. Moreover, lenders can lower interest rates, since they have less risk on loans sold to Fannie and Freddie.

A second change is further clarification of the circumstances in which Fannie and Freddie can refuse to purchase a loan, pushing it back on the lender. Confusion about this practice has had a surprisingly large effect, slowing lending, particularly for small lenders. They have been the most active in the market in the past few years, and having even one mortgage pushed back on them would tie up a large percentage of their available capital. Meanwhile, for large lenders, billion-dollar penalties levied on some for lax lending have spooked them and they have focused on growing other types of lending, such as business and consumer loans. Federal Housing Finance Agency Director Mel Watt’s comments that lenders shouldn’t be overly concerned about so-called putbacks, and further actions by the FHFA to reduce the uncertainty about the rules should go a long way to improve credit conditions in general.

The impact of these changes will be significant. Lending would go up by an estimated 10% if lenders considered borrowers with FICO scores below 640. For example, the lower FICO scores of immigrants who are accustomed to using cash instead of credit may not accurately reflect their ability to repay a mortgage.

Part of the market is already nearing normal conditions. Sales of existing homes are expected to grow 8% in 2015, and are likely to match or exceed what would have been considered average between 1999 and 2002, just prior to the housing boom and subsequent bust of the last decade. The strong rental market has pushed multifamily construction back to normal levels and now multifamily starts are likely to grow less vigorously—perhaps 5% this year. New single-family home construction and sales, however, are likely to surge by 25% or so in 2015. That will still put them at only about 70% and 60%, respectively, of prebubble levels, and they will not recover fully until at least 2017. Expect starts to hit 800,000 in 2015 and new-home sales, 545,000.

New-home supply shortages will continue to ease gradually. A number of large builders are beginning to shift their focus from high-end to lower-priced houses. The shortage of skilled tradesmen such as carpenters and framers, which has hampered construction in recent years, will abate as wages rise and consistent work attracts more workers back to construction. Many found jobs outside the housing sector when the housing market crashed and construction dried up. In addition, land which developers began to develop a year or more ago will finally become available to build in the coming year, after clearing various regulatory hurdles.

Expect continued moderate home price increases in the neighborhood of 3.5% in 2015 for the nationwide average. That’s a bit less than the 4% gain in 2014. The sharp rebounds of 2012 and 2013 are over and investors are again finding better returns in financial markets.

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

More from Kiplinger: Housing Outlook , 2015

Retail

Last updated: January 16, 2015

By Lisa Elaine Babb

We expect retail and food sales to climb about 4.2% overall in 2015, similar to the increase in 2014. Though lower gasoline prices will see spending at the gas pump drop 9% for the year, keeping a lid on overall retail sales growth, the extra cash in motorists’ pockets will help boost sales of all other items by an average of 5.6%.

Retail sales will be aided by a better jobs market, higher wages and improved consumer confidence. Among businesses that will benefit: restaurants and bars, as people with more discretionary income in their pockets go out more. Spending at eateries and such will climb 9.2% this year. Auto dealers can expect another good year, though the pace of car sales will slow to about 5% this year, compared with 8% last year. Pickup trucks and SUVs will do well, thanks to low gas prices.

The housing recovery will help to boost sales of building materials by about 7%. Sellers will also spend more at nurseries and home improvement stores to spruce up homes they plan to put on the market.

Dept. of Commerce: Retail Data

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Trade

Last updated: January 9, 2015

By Glenn Somerville

The U.S. trade deficit with the rest of the world will widen significantly this year — by as much as 10%, or twice last year’s increase. The deficit is growing because continuing improvement in U.S. economic performance will make U.S. markets a prime target for foreign producers. At the same time, growth in China is slowing, and Europe will struggle to eke out modest growth this year. Moreover, the dollar’s continuing appreciation against the euro and many other currencies, including neighboring Canada’s, is driving up the cost of American-made goods and services for foreign buyers. For the full year 2014, a deficit of about $500 billion, up 5% from a year earlier.

We expect the U.S. dollar to remain strong through much of the year, pressuring U.S. exporters. U.S. capital goods producers are particulary vulnerable as foreign buyers pull back on purchasing U.S.-made products. For example, total exports in November fell by 1% to $196.4 billion, with much of the monthly decline centered on capital goods, including commercial aircraft. Export sales to Canada, Mexico, China, Japan and the European Union all dropped in November, and will likely continue to be restrained this year because of the strong greenback. As U.S. exporters are coming under pressure abroad, the U.S. economy is generating more jobs plus increased purchasing power and appetite for foreign-made goods — the recipe for a rising trade deficit.

Falling commodity prices, especially for oil, are both a positive and a negative for trade. Big declines in oil prices since mid-2014 make the bill for imported oil easier to bear. But lower prices also limit what American energy companies earn abroad, just as foreign sales are growing. In November, the U.S. bill for imported oil tumbled by $3.1 billion to $23.1 billion — the lowest since August 2009. Oil prices likely will stabilize at moderately higher levels by spring, in the range of $70-$75 a barrel, but the U.S. will continue to pay less for oil imports as rising domestic production reduces the need for them. Petroleum imports in the first 11 months of 2014 are more than 9% lower than in the comparable 2013 period, while petroleum exports are up by more than 9.5%, spelling the lowest U.S. monthly deficit for petroleum in nearly 11 years.

Dept. of Commerce: Trade Data

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