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Tool | March 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, 4.2%
Inflation
1.5% for '15; 0.8% for '14
Business spending
Increasing by 5% in '15, matching '14's growth
Energy
Crude oil trading from $60 to $65/bbl. by midsummer
Housing
New single-family home starts and sales up 19% in '15
Retail sales
Up 4.5% this year, excluding gasoline sales
Trade deficit
Widening by 10% in '15
Practical Economics columns
Make sense of the latest data and trends.

GDP

Last updated: March 9, 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 is a good bet to continue to expand next year at a better than 3% rate.

Look for reenergized consumer spending as well as an uptick in home building to boost the nation’s GDP in the second quarter and beyond, on the heels of first-quarter GDP that’s expected to clock in as low as 2% — roughly on a par with growth in the fourth quarter of 2014. While the strong dollar is making imported goods and services cheaper for consumers and businesses, it’s also deterring exports, which are a continuing drag on growth.

Consumers are energized by the availability of more jobs and lower energy prices, which are putting more money into their pockets, some of which they’re shelling 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 this year is at its highest level since 2007.

With consumer spending on the rise, 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.

Dept. of Commerce: GDP Data

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Employment

Last updated: March 6, 2015

By David Payne

The labor market will continue to tighten. Expect monthly job gains in 2015 to average 260,000 — about 3.1 million for the year, equal to 2014’s job growth. The gains will fuel consumer and business confidence and lead to rising wages and consumer spending.

Eventually, job gains will slow to a more sustainable 200,000 per month as the unemployment rate nears its full employment level of around 5%, but that probably won’t happen until next year.

In February, companies hired 295,000 more workers, with gains spread across nearly all industries. Job growth in food services continued to be phenomenal, supporting the notion that Americans are using their gas savings to treat themselves to more nights out on the town. Employment in the construction industry also climbed in February, despite harsh winter weather in the Northeast, and will likely rise further as the housing market perks up. The number of job openings is also up, a further indication of more hiring to come.

The tighter labor market points to further strengthening of the economy. GDP growth is likely to continue at better than 3% through 2016.

Look for the unemployment rate to finish the year at 5.3%. The rate fell to 5.5% in February, though the decline from 5.7% in January happened solely because a number of unemployed folks dropped out of the labor force. Still, declines in the rate are likely to slow this year as better job prospects bring more people back into the labor pool looking for work. (These folks are counted as unemployed if they are looking for work, but not in the labor force if they are not.)

With more folks finding jobs, employers will feel pressure to hike wages. Wage growth for nonsupervisory workers is likely to bump up a bit, 2.5% by the end of the year, after running at about 2% for most of the second half of 2014.

Dept. of Labor: Employment Data

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Interest Rates

Last updated: March 2, 2015

By David Payne

The Federal Reserve will bump up short-term rates by one-quarter of a percentage point sometime in June, July or September, with an additional quarter-point increase possible before the end of the year. By the end of 2015, figure on a federal funds rate of 0.5% to 0.75%, up from 0% to 0.25% now, and a bank prime rate of 3.75%, from 3.25%.

Long rates are likely to move less. Expect 10-year Treasuries to end the year around 2.5% (from 2.1%) and 30-year fixed rate mortgages at 4.2% (from 3.8%). Though short rates depend almost completely on the federal funds rate, long rates and bond prices are affected by other factors. A series of dampening influences are keeping them from rising faster, including slowdowns in the eurozone, Russia and China.

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 a partial rebound in gasoline prices. Long-term expectations of tame inflation are also supporting bond prices and keeping rates low.

Fed chief Janet Yellen knows that the Fed will have to increase rates at least a little this year to maintain perceptions that the Fed is ahead of the game. However, she has made it clear that she won’t rush and will let the data decide the timing. And she continues to emphasize that the labor market has room for improvement.

Finally, though the Fed will never mention the value of the dollar in its public deliberations, it is likely to be reluctant to strengthen the buck further by raising rates much while other countries have lowered theirs.

Federal Open Market Committee

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Inflation

Last updated: February 27, 2015

By David Payne

Inflation will stay low this year. Consumer prices will pick up 1.5% in 2015, compared with an exceptionally low 0.8% increase last year. Inflation will stay well below the Federal Reserve’s 2% target rate as a strong dollar causes prices of imported commodities to decline. This will benefit U.S. consumers as manufacturers pay less for raw materials, enabling them to keep the lid on prices of goods produced in the U.S. Other factors: Wage increases will continue to be moderate, and oil prices will stay low.

Some outliers: Medical costs will go up about 4% this year. The cost of shelter will continue to rise at about a 3% rate, faster than overall inflation, because rents are climbing. That trend will continue for at least a year, until housing sales improve and demand for rental units levels off. And college tuition is likely to rise about 3%.

The core rate of inflation, which excludes food and energy prices, will rise by about 1.4% in 2015, December to December. That’s less than the 1.6% rate in 2014. The core rate is typically seen as a more accurate gauge of underlying inflation because of the volatility of food and energy costs.

Eventually, the stronger economy will boost general inflation, but probably not until 2016 or later, giving the Federal Reserve more flexibility in managing interest rates without the markets beginning to worry that it isn’t raising interest rates fast enough.

Dept. of Labor: Inflation Data

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Business Spending

Last updated: March 27, 2015

By Glenn Somerville

A strong dollar, lackluster domestic demand and soft overseas markets will keep a damper on business spending for at least the first half of 2015. We still foresee a pickup in capital expenditures over the course of the full year, but spending momentum is unlikely to show up until well into the second half. U.S. oil & gas exploration and development companies slashed their capital equipment budgets in the face of the sharp slump in oil prices that set in about mid-2014. So far there is no reason for them to reverse those cuts. Meanwhile, demand for U.S.-manufactured goods appears to be softening as overseas economies struggle to accelerate, and a stronger dollar makes it cheaper for foreign buyers to purchase capital goods elsewhere. We still expect business spending to grow by 5% this year, matching 2014’s increase.

U.S. and global growth are expected to gain steam during 2015, boosted by cheaper oil and by central bank stimulus in Europe and elsewhere. But uncertainty stemming from moderating growth in China and questions about how fast European economies will pick up their pace of recovery is keeping businesses cautious. Eventually, though, consumers will spend more on goods and services, which typically calls for more investment in plants and equipment to meet growing demand.

The manufacturing sector is most directly affected by changes in business investment spending, and it shows some strain at the start of 2015. On the positive side, sales of new cars and light trucks remain robust, which should encourage automakers and parts suppliers to add plant capacity and upgrade equipment. Sales of these vehicles should rise to 16.8 million this year, from 16.4 million in 2014. Aircraft makers have hefty order backlogs; Boeing received orders for 72 new civilian aircraft in February, compared with just five new orders in January.

But new orders for all types of nonmilitary capital goods, excluding aircraft, dropped by 1.4% in February after falling slightly, by 0.1%, in January. Shipments of finished goods — a measure of how busy factories were — also dipped fractionally in each of the first two months of the year. Weak machinery orders accounted for much of the softness in investment goods demand, a direct reflection of the double whammy that a robust dollar and weak growth overseas is delivering to U.S. business spending.

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

Energy

Last updated: March 27, 2015

By Jim Patterson

Yet another new wrinkle for volatile oil prices: Yemen. Airstrikes by Saudi Arabia against the Iran-backed militias that have taken control of the country gave a swift boost to crude oil prices. West Texas Intermediate (WTI), the U.S. crude benchmark, quickly rose to $50 per barrel, from $45 several days ago, as traders fretted that the conflict could lead to direct fighting between Saudi Arabia and Iran. Such a war could interrupt crude exports from some of the largest oil producers in the world.

Markets figure to remain on edge. But barring full-blown war, the price run-up is unlikely to last. The conflict seems likely to stay contained to Yemen, whose oil exports are puny compared to its giant neighbors. Odds are, oil prices will soon retreat back toward $45 per barrel once the market is sure that exports from Saudi Arabia or other Persian Gulf producers won’t be affected.

But by summer, we expect a more sustained run-up in crude prices as gasoline demand picks up and U.S. oil production takes a hit from the cutback in drilling that started last autumn. About half the rigs operating in October are now idle, which suggests output will slow its recent growth, or even drop a bit, as older wells dry up and fewer new ones come on line to replace them. Look for WTI to trade from $60 to $65 per barrel by August.

Gasoline prices will likely hold steady, roughly on a par with recent weeks. At $2.43 per gallon, the national average price of regular unleaded is unchanged from a week ago and will probably hold between $2.40 and $2.50 in coming weeks. The same goes for diesel, which is also unchanged from a week ago at $2.85 per gallon.

Natural gas prices won’t move much, either. At $2.61 per million British thermal units, the benchmark gas price is off a few pennies from a week ago and not far from the $2.75 level we’ve been expecting this spring. Continued rapid supply growth will keep markets well stocked while demand continues to wane with the arrival of warmer weather. That should allow stocks of natural gas held in storage to rebound from today’s below-average level, keeping a lid on prices.

Dept. of Energy: Price Statistics

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Housing

Last updated: March 9, 2015

By Rodrigo Sermeño

With harsh winter weather in the rearview mirror — hopefully — home builders are looking ahead to a solid year.

We expect single-family housing starts to expand at a double-digit rate in 2015, on a pace to hit 770,000, up from 646,000 last year.

Builders will welcome the increased activity, though the housing sector has much further to grow before reaching 1.15 million units — the number of single-family starts considered typical for a well-functioning housing market.

Multifamily starts are expected to pick up by 5% this year, to 370,000. Low vacancy rates in the rental market have perked up demand for multifamily construction, bringing such construction to its long-term average.

As for sales of existing homes, we expect them to rebound this year to 5.25 million, from 4.9 million in 2014. New-home sales will reach an average of 520,000 for the year, up 19% from last year.

The reemergence of first-time home buyers, who have largely been sidelined since the recession, will help fuel the housing recovery. The number of first-timers will edge up as a share of all purchasers of existing homes in 2015, from about 28% now to perhaps 30% or a bit above. In good housing years of the past, the share was 35%.

Home prices will continue their upward momentum this year, with growth strongest in the western U.S., where a number of urban areas will approach double-digit gains.

Though mortgage rates will tick up in 2015 along with most other interest rates — to 4.2% from the current rate of 3.8% — they won’t deter most prospective home buyers.

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

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Retail

Last updated: March 17, 2015

By Lisa Elaine Babb

Retail sales got off to a slow start this year, as extremely cold weather and record snowfall in parts of the Northeast dampened February sales. But expect warmer weather to usher in more spending in the spring.

Excluding gasoline, retail sales will climb about 4.5% this year, compared with a 4% increase in 2014. Low prices at the pump will continue to keep a lid on gas station revenue, slowing total retail sales growth to about 2.5% for the year.

The lower price for a gallon of gasoline, coupled with a strengthening economy, will nudge consumers to dig deeper into their pockets. Consumer sentiment is up considerably over last year, plus more job opportunities are opening. Wages should tick up.

Expect to see continued strong growth for restaurants and bars – about 8% -- as folks shell out more of their discretionary dollars on dining out and drinking. Furniture firms should see sales bump up about 4% as the swelling ranks of first-time home buyers look to decorate. Sales of building materials will grow by 5%, fueled by construction tied to new-home sales.

Dept. of Commerce: Retail Data

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Trade

Last updated: March 11, 2015

By Glenn Somerville

Despite a favorable start to the year, the U.S. deficit on trade with the rest of the world is set to widen significantly again in 2015. The shortfall between exports and imports climbed 6% during 2014 to a total of $504.7 billion, and this year’s increase will be greater, perhaps as much as 10%. The key reason: Stronger U.S. economic growth will suck in more exports from overseas while U.S. exporters struggle with the impact of a rapidly rising U.S. dollar that makes American goods more expensive in foreign markets at a time when overseas growth already lags.

January’s trade performance was something of an anomaly, with the deficit dropping 8.3% to $41.8 billion, from $45.6 billion in December. Both imports and exports declined during January, but a West Coast ports dispute — since settled — that disrupted supply chains skewed the monthly trade figures. The January deficit with China, the largest with any single country, rose slightly to $28.6 billion from $28.3 billion in December, but we expect that number to climb more sharply in coming months because of a healthy U.S. appetite for cheap consumer goods.

The dollar’s value against currencies of all major U.S. trade partners will remain elevated throughout 2015. Europe is showing signs of revival, but its rate of growth remains far lower than that of the U.S., and the euro is falling in value against the dollar — an advantage to German and other European manufacturers that sell goods, from luxury cars to machinery, to U.S. markets. China’s economy is growing more slowly, and it is trying to ratchet up its exports. Meanwhile, U.S. sales to Canada and Mexico are constrained by the strong greenback.

Stronger imports over the course of 2015 should help stimulate growth overseas, especially in Europe and Asia. American consumers have more money in their pockets because of cheaper gasoline and relatively robust labor markets — the primary reason for rising demand for imported goods. Another positive note: Surging production of oil and gas in the U.S. continues to reduce reliance on imported oil from the Middle East and elsewhere, while cheaper prices also tamp down the import bill. In January, petroleum imports were down a steep 24% from December levels, to $17.7 billion. That was an exceptionally big monthly decline, but the trend toward buying less oil abroad and producing more at home is firmly in place.

Dept. of Commerce: Trade Data

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