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Tool | June 2015

Kiplinger's Economic Outlooks

GDP
3.5%-4% in second-half '15; 2.5% for the year
Unemployment
Falling to 5.1% by end '15
Interest rates
By end '15, 10-year T-notes at 2.4%; mortgages, 4.1%
Inflation
1.6% for '15, up from 0.8% in '14
Business spending
Increasing by 4% in '15, vs. 5% in '14
Energy
Crude oil trading from $60 to $65/bbl. by August
Housing
New-home sales rising 20% in '15
Retail sales
Up 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: May 29, 2015

By David Payne

Don’t be thrown by the weak first-quarter GDP report. In a replay of last year, harsh winter weather that hindered housing starts and sapped consumer spending is largely to blame for the 0.7% contraction.

Decreased exports because of the rise in the value of the dollar also factor in the sluggish showing, as does a decline in oilfield investment due to the drop in oil prices.

The economy is sure to pick up steam in coming months. Note that a slow start last year was followed by a strong rebound. We expect a similar pattern this year, with growth of more than 4% in the second half of the year.

Continuing job gains and growth in consumer incomes will spur purchases of homes, cars and other products and services. Lower gasoline prices are also putting more money into consumers’ pockets, helping to fuel consumer outlays in the months to come.

The housing market is also in for a solid year, propelled by job and income gains plus an increase in household formations and pent-up demand.

And though the Federal Reserve has more or less promised to start raising interest rates this year — most likely in September — we expect the hikes to be modest.

Dept. of Commerce: GDP Data

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Employment

Last updated: June 5, 2015

By David Payne

The positive jobs gain of 280,000 in May — the strongest showing since December — shows an economy that is returning to full expansion mode, which will continue through the year and into 2016. It also underscores that weather-plagued weakness earlier in the year was just a hiccup and not the foreshadowing of something more grim.

Several sectors that had slowed hiring in March and April came back strong in May: retail, leisure and hospitality, health care, professional and business services. Even government surprisingly added to payrolls. The energy sector is still lagging because of low oil prices, but we see more hiring there, too, as oil prices pick up going forward.

Moreover, the size of the labor force is increasing significantly: More folks entered the labor force for the first time in May, and fewer people left. Also declining — for third month in a row — is the number of unemployed people who are giving up looking for work. And the number of discouraged workers (folks who have already stopped looking for jobs) dropped by a large amount in May to its lowest level since 2008. These trends spell an increasing optimism among American workers.

We expect a total of 2.8 million jobs to be added in 2015. Eventually, job gains will slow to a more sustainable level as the unemployment rate nears 5% and reserve pools of labor are exhausted, but we don’t see that happening until next year.

Look for the unemployment rate to finish the year at 5.1%. It edged up to 5.5% in May, but that’s a positive development, because it signals a higher labor participation rate. In other words, more people are staying in the labor force and looking for work.

Dept. of Labor: Employment Data

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Interest Rates

Last updated: June 5, 2015

By David Payne

Long-term interest rates will tick up in coming months from 2.4% now as markets react to improving U.S. and European economic growth.

But by year-end, with markets realizing that stronger growth won’t fire up inflation, we see 10-year Treasuries retreating to around where they are now, while 30-year fixed-rate mortgages wind up at 4.1%, versus 3.9% now.

Note four reasons why long-term interest rates should stay relatively low for a while, regardless of what happens to short-term rates: First, consumer prices in the United States are unlikely to rev up much anytime soon. Second, European interest rates will likely settle down as investors realize that the European Central Bank will stay on its expansionary path despite improving European growth. The ECB intends to continue to buy 60 billion euros a month until September 2016, a substantial share of the eurobond market. Third, the Federal Reserve is not going to want to widen the gap between U.S. and European interest rates too much, and thus risk taking blame for an even bigger rise in the value of the dollar, which is already robust versus many other currencies, hurting U.S. exporters. Finally, growth in China is likely to continue to slow, ensuring that China’s central bank will stay committed to expansionary policies.

With the economic expansion on a roll, we still look for the Fed to bump up short-term rates by one-quarter of a percentage point in September, before taking a wait-and-see approach to raising them further. Despite a 5.5% unemployment rate, Fed Chair Janet Yellen still sees slack in the labor market, noting there are more dangers associated with raising interest rates too quickly than with not quickly enough. She’ll be sure to evaluate the impact of the September increase before moving on. Odds are, another increase wouldn’t come until the Fed’s meeting in December (skipping over the October meeting) and perhaps not until January.

Federal Open Market Committee

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Inflation

Last updated: June 19, 2015

By David Payne

The two main inflation measures will inch higher this year, but will remain at relatively low levels.

Overall consumer prices should rise by 1.6% during the calendar year, about double the exceptionally low 0.8% increase in 2014. Higher gasoline prices are behind the bump up.

The core inflation rate, which excludes food and energy prices, will rise by about 2%, compared with a 1.6% increase last year. That increase will be roughly in line with an expected pickup in wages to 2.5% this year, from 2% last year.

The core rate is typically seen as a more accurate gauge of underlying inflation because of the volatility of food and energy costs. While total price inflation will stay below 2% until 2016, the Federal Reserve may use the jump in core inflation to justify an interest rate hike in September. Their rationale would be that core inflation represents the persistent part of inflation that they want to limit.

The strong dollar will limit price increases of commodities, because U.S. manufacturers are paying less for raw materials and are competing against lower-valued imports.

Prices for services and prescription drugs will rise the fastest this year. Medical services costs will go up about 3.5%, while prescription drug costs will increase about 5%. The cost of shelter will continue to rise at about a 3% rate because rents are climbing. That trend will continue for at least a year, until housing sales improve and demand for rental units levels off. College tuition is likely to rise about 4%.

Dept. of Labor: Inflation Data

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Business Spending

Last updated: June 24, 2015

By Glenn Somerville

We still see business spending expanding by 4% this year, despite hitting another soft patch in May, when orders for costly long-lasting goods fell 1.8% on the heels of a 1.5% drop in April.

Weak orders for new commercial aircraft accounted for much of the slack in both months, but there are indications that demand has picked up this month. Key producer Boeing has a healthy order backlog, in any event. The best reason for optimism about the months ahead: Orders for core capital goods, a category that includes nondefense items and excludes aircraft, climbed by 0.4% in May after weakening 0.3% in April. The number is seen as a proxy for company spending on equipment and software, so the modest pickup in May is encouraging for the longer term even if it doesn’t point to assembly lines humming until later in the year.

By late fall, we expect corporate purse strings to loosen modestly enough to accommodate more investment. U.S. labor markets are tightening, supporting stronger income growth and spending by consumers. Sales of new cars and light trucks have held up well, inducing carmakers to maintain or expand capacity and to keep modernizing plants. Moreover, the housing sector is showing solid signs of rebounding from a soft, weather-plagued start to 2015. The housing recovery will hike demand for a range of manufactured goods from trucks to tools and industrial machinery.

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

Energy

Last updated: June 19, 2015

By Jim Patterson

Oil prices are stuck in a rut. Despite repeated small rallies, West Texas Intermediate — the benchmark U.S. crude — can’t hold its ground above $60 per barrel. This week, WTI ended on a down note, falling to a bit over $59 per barrel. Oil market reports released during the week continue to show that U.S. and global markets are well supplied, which makes it tough for prices to advance. Look for crude to gradually move a tad higher from today’s level. We see WTI trading in a range of $60 to $65 per barrel by August, as the economy speeds up and demand strengthens.

Prices at the pump aren’t doing much, either. The national average price of regular unleaded gasoline rose about a penny and half this week, to $2.80 per gallon — a mark we expected to see. Gas prices probably will keep edging higher, but any gains will be small. Figure on an average of about $2.85 or slightly more by the July 4th holiday weekend. Diesel is barely budging; at $2.86 per gallon, it’s off a fraction of a cent from last week. We look for diesel to near $3 sometime this summer.

Natural gas prices remain in the summer doldrums. At $2.77 per million British thermal units, the benchmark gas price is off slightly from a week ago, and squarely within our expected trading range of $2.60 to $2.90. Barring a severe heat wave that stokes demand for electricity from gas-fired power plants, we look for prices to continue languishing near these levels for much of the summer.

Dept. of Energy: Price Statistics

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Housing

Last updated: May 29, 2015

By Rodrigo Sermeño

The housing market seems to be improving, but various indicators continue to provide mixed signals. Real estate agents and builders both report more interest from buyers, boosting their expectations of solid spring home buying numbers. Demand has clearly increased as steady job growth, low mortgage rates and rising rental costs have pushed potential buyers into the market. The number of people signing contracts to buy a previously built home has risen for four consecutive months.

We expect existing-home sales to strengthen in coming months as pending home sales are finalized. Existing-home sales fell 3.3% in April, but remain 2% above last year’s pace. Inventory of homes on the market remains low, despite a slight increase in recent months. As a result, buyers are finding strong competition for properties. Homes have been selling quickly, staying on the market for 39 days on average.

New-home sales will grow by 20% in 2015. They’re averaging 515,000 a month so far this year — a healthy pace not seen since 2008 — and are up by 26% from March 2014.

Housing starts perked up significantly in April. They increased 20% from March to a seasonally adjusted annual rate of 1.1 million. This pace, while indicating positive momentum, is still well below what is needed to keep up with demand and stave off strong price appreciation.

But lending isn’t keeping pace. Loans for acquisition, development and construction have increased during the last two years, but remain far below past levels. Tight credit is a factor in holding back a stronger rebound in residential construction. Builders, though, are starting to see some improvement in construction-lending conditions, partly due to a wider array of nonbank financial institutions making loans.

Prices will continue their steady, upward trend. They jumped 4.1% in March from a year ago, and look to pick up pace a bit because of the combination of tight inventories and subdued new residential construction.

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: June 12, 2015

By Lisa Elaine Babb

A solid pickup in retail sales in May bodes well for retailers going forward as consumers show more confidence in the economy and a willingness to keep spending.

The ramp-up in spending in May boosted retail sales 1.2% for the month, following a paltry 0.2% increase the month before, which saw Americans saving more and spending less.

Among retailers who are hearing their cash registers ring more often: Car dealers, sellers of building materials and garden equipment, and gas station owners. The last are seeing Americans driving more because gasoline remains relatively cheap. But core retail sales, which exclude autos, gasoline, building materials and restaurants, also posted a strong 0.64% increase, paced in large part by Amazon, eBay and other online sellers.

We now expect retail sales growth – excluding gasoline – to approach 5% for the year versus 4.7% in 2014, bolstered by more people finding jobs -- or higher-paying jobs -- and wages climbing 2.5% on average by year-end.

Rising disposable incomes are sure to prompt folks to spend more on painting the town, which will help boost sales at restaurants and bars 8% from last year. Online sellers and catalog merchants will see sales go up more than 10%. Sales of building materials for the year will climb a solid 7%, fueled by remodeling projects and construction of new homes.

Dept. of Commerce: Retail Data

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Trade

Last updated: June 5, 2015

By Glenn Somerville

A widening trade deficit is in store this year, driven partly by a stronger dollar, which makes U.S. exports more costly for foreign buyers. The dollar’s higher value against the euro, Japanese yen and other currencies also drives down prices for imports to the United States.

Another factor in the growing trade gap: GDP growth will speed up in the remainder of 2015, making the U.S. market an even more attractive target for trade partners seeking to boost their own economies. We anticipate a full-year deficit of about $555 billion this year, 10% more than in 2014. In April, the deficit dropped by a surprisingly steep 19.2% to $40.9 billion as exports of goods and services edged up 1% and imports fell by 3.3%. But that import dip was exaggerated because it followed a surge during March, when ships that had been waiting for weeks due to work stoppages at West Coast ports finally were able to unload. There’s a chance that imports will be down again in May, but after that, the stronger dollar and faster growth will draw growing volumes of imports.

Exported goods posted a second straight monthly increase in April, primarily on increased sales of capital items and industrial supplies. But they will come under increasing strain later this year as some buyers of U.S. machinery and other hard goods look for less-expensive alternatives. Services exports were moderately higher in April and are holding relatively steady on a month-to-month basis so far this year.

Trade was a drag on overall economic performance in last year’s fourth quarter and again in the first three months of this year. (The GDP measure counts exports as a positive for economic growth, while imports are a negative). But trade will lift GDP in the second quarter if it turns out — as is anticipated — that imports stabilized or fell further in May. Later, trade will again become a modest drag on growth and remain one into 2016. Europe’s growth will trail that of the U.S. this year and next, and China is slowing as well, so demand for U.S. exports is likely to soften.

One continuing bright spot: The cost of imported oil keeps dropping as the United States moves steadily closer to energy independence. The deficit on imported petroleum was down to $6.8 billion — the lowest since March 2002 — and the price per barrel of imported crude, $46.52, was less than half the $95 price a year earlier. By the end of the decade, rising production from U.S. shale fields will make the United States not only fully independent in energy trade but also a net exporter.

Dept. of Commerce: Trade Data

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