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Tool | July 2014

Kiplinger's Economic Outlooks

GDP
1.5% in '14; 3% or better in second half of year
Unemployment
Bouncing around; about 6.3% by end ’14
Interest rates
Short-term rates to stay low through '14
Inflation
Ticking up slowly to 2.4% in '14
Business spending
Spending up 4.5%-5% in '14 as U.S. growth strengthens
Energy
Oil trading from $100 to $105/bbl. through Aug.
Housing sales
Continuing to pick up after a poor first quarter
Retail sales
About 4% growth in '14
Trade deficit
Unchanged from '13; U.S. growth pulling in more imports
Practical Economics columns
Make sense of the latest data and trends

GDP

Last updated: June 27, 2014

By David Payne

Look for the economy to pick up speed in the second half of 2014, with GDP rising at about a 3% annualized rate as the expansion cycle matures and hindrances to growth ease. Given the dismal first quarter (a -2.9% growth rate) and the likelihood that higher food and energy prices will dampen growth in the second quarter, GDP is likely to rack up only about 1.5% growth for the whole of 2014. The second- quarter GDP gain is likely to total about 2.5% (annualized).

The stage is set for much improved performance, however. Disposable income adjusted for inflation grew at a healthy 3.0% annualized rate in January through May. Consumer confidence has bounced back, climbing above its 2013 peak, and is now at its highest level since before the recession. Motor vehicle sales in May hit their highest level in eight years. And an index of manufacturing purchasing managers’ activity points to strongly expanding output. Plus, hiring is on the rise, new unemployment claims have been running at a very low rate in May and June, and retail sales have rebounded.

What’s more, there’s still a chance that growth will accelerate more dramatically in the second half of the year. Consumer spending and confidence remain way below what would be considered normal levels by the standards of past economic expansions. As job growth returns and consumers feel more secure, more robust income and spending increases may well be triggered, pushing second-half growth over the expected 3% pace. While that happening in what remains of this year is an outside chance, it’s a good bet that in 2015 such a virtuous cycle will kick in.

As for the sharp first-quarter slowdown, it isn’t quite as disheartening as it first appears. The decline doesn’t indicate a systemic weakness, and there may even be some offsetting upward bounces yet to come. Weather depressed consumption of goods and housing. Both exports, especially to China, and business investment in aircraft and computers surged at the end of 2013, and a partial pullback in those areas was to be expected. Unsustainably strong business stockpiling of inventories last year returned to a more normal rate. And finally, odds are uncertainty about the introduction of Obamacare contributed to the decline in health care spending in the first quarter. Higher enrollments will eventually turn into spending gains.

Dept. of Commerce: GDP Data

More from Kiplinger: 2014 Economic Outlook, State by State

Employment

Last updated: July 7, 2014

By David Payne

A jump of 288,000 jobs added in June confirms our expectation of a faster hiring pace in the latter half of 2014. By year-end, monthly job creation should average about 240,000 a month, with a total of 2.8 million workers added to payrolls over the year. Monthly gains so far this year have averaged 231,000.

Don’t expect much improvement in the unemployment rate, however. The rate fell to 6.1% in June largely because fewer nonworkers were enticed to come back to the labor force to look for jobs than in previous months. A normal flow would run 200,000 to 300,000 higher. Also, slack remains in the labor market. The labor force participation rate is still a very low 62.8%, and it has been flat since March. More hiring is likely to encourage more people to look for jobs. These are counted as unemployed while they are looking, so the unemployment rate will likely stagnate, or even possibly climb for a month or two.

It’s good news that gains were spread broadly across most private industries, with only modest declines registered in a handful of industries. In addition, federal and state government employment rose slightly, and local governments hired a bunch of teachers. Temporary-help employment, which tends to lead employment in other sectors, continued to grow.

There is a gray lining in this silver cloud: Full-time jobs slipped in June while the number of part-time jobs soared. The trend toward more part-time work is worrisome, in that it limits the income growth needed to fuel an economic upswing.

We expect wage growth to accelerate this year -- a major plus for consumer spending. Pay of nonsupervisory workers -- 83% of the workforce -- increased 2.3% over the past 12 months and will likely pick up by 2.5% by the end of the year, with faster growth in both 2015 and 2016. Because such workers are at the lower end of the pay scale and a higher percentage of their pay is spent quickly, the jump in wages tends to have a faster impact on consumer demand and economic growth than an increase in the earnings of supervisors.

Dept. of Labor: Employment Data

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Interest Rates

Last updated: June 27, 2014

By David Payne

10-year Treasury rates will rise slowly to 3.0% by the end of 2014, hovering a few tenths of a percentage point lower than that for most of the year. Bond demand has held up well, as the Federal Reserve ratchets down its massive bond buying program and concerns about the effect of the so-called taper are no longer influencing interest rates. Rates are likely to be most responsive now to reports indicating the strength of the economy, as investors try to anticipate the timing of Fed tightening in mid- to late 2015.

Fed Chair Janet Yellen has so far indicated a strong pro-growth stance, primarily based on concerns about full recovery in the labor market. That would suggest that the Fed will hold off raising short-term interest rates this year, even as GDP growth rebounds after a dreadful first quarter and strengthens further in the second half of 2014. At some point in 2015, the Fed will have to tighten policy, however, and long-term Treasury bond rates will start to rise when investors begin to sense some stirring by policymakers.

Don’t be surprised to see rates jump by half a percentage point when that happens -- probably in early 2015. Similar nervousness jolted rates higher in mid-2013, when it became clear that the Fed would soon reduce its monthly bond buying binge. But just as rates stabilized once the taper actually began, anxiety will fade and rate hikes will moderate once investors absorb the initial adjustment. By the end of 2015, figure on rates in the neighborhood of 3.7%.

Rates in the two- to seven-year maturity range have picked up a tenth or two in the past month as nervousness about Fed policy picked up just a bit. So far, there has been little effect on 10-, 20- and 30-year bonds.

The rate for 30-year mortgages -- now around 4.2% -- will likewise edge slowly up to 4.5% by the end of 2014, and follow the Treasury bond rate in its jump up in early 2015, ending next year around 5.25%. This is low by historical standards, but the effect of higher home prices on affordability will likely mean that we will never return to the historical average, unless there is a bout of general inflation.

Federal Open Market Committee

More from Kiplinger: Interest Rates and the Fed's Taper Plans

Inflation

Last updated: June 25, 2014

By David Payne

Inflation is headed higher, hitting 2.4% over the year, largely because of a surge in food and energy costs. The tab for putting the family dinner on the table is up sharply. Prices for pork have increased because of an outbreak of a virus that’s reducing supplies, and beef has risen as a result of herds culled in the wake of last year’s drought. Plus an ongoing drought in California is boosting prices for a variety of fresh fruits and vegetables. By May, the annualized rate for the first five months of the year had climbed to 2.5%. We should, however, see a slight easing of monthly increases by the end of the year as food prices other than for meat settle down. Pressure should remain on beef, pork and chicken prices for some time to come because it takes time to build up stock. Meanwhile, gasoline prices are likely to pick up in coming months as political turmoil in the Middle East spooks traders, pushing crude oil prices higher. In the early months of the year, the harsh winter led to price hikes for natural gas and electricity.

Excluding those two volatile categories, however, the Consumer Price Index is likely to rise a more moderate 2.1%, measuring from December 2013 to December 2014. That core rate, which is considered a better reflection of underlying systemic inflation, rose at a 2.3% clip (annualized) in the first five months of 2014, up from a 1.7% rate in 2013. The core rate should settle down to a 2% average in the second half of 2014.

Slightly greater than expected consumer price increases in May aren’t necessarily cause for concern. Isolated blips in monthly prices -- such as those seen in May for food, energy, housing and medical care -- are common. If, however, June or July price increases are also surprisingly large, that may indicate a stronger, and more troublesome, upward trend than we now anticipate.

Dept. of Labor: Inflation Data

More from Kiplinger: Print-Ready Consumer Price Index Chart

Business Spending

Last updated: July 1, 2014

By Glenn Somerville

Business investment spending is perking up, helping to lead the economy out of a steep slump at the start of the year. A capital spending increase in the range of 4.5% to 5% is in the works this year. While it’s not soaring growth, it’s nonetheless a nice improvement from the paltry 1.5% spending gain of 2013. The improvement is both much needed and overdue. Fortunately, it should continue: We look for business spending next year to finally return to the 6% gain that it registered in 2012.

Companies are starting to add to capacity as the economy rebounds from the sharpest first-quarter contraction since the recession five years ago. Sales and orders for new cars are climbing, and home sales are strong, which will help keep manufacturing industries on track for more-vigorous expansion in the second half of the year. Corporate planners considering borrowing for expansion are well aware that current low interest rates won’t last forever. That should help bring forward some project spending. Core capital goods orders, which exclude aircraft and are taken as a proxy for business investment, climbed by 0.7% in May after declining 1.1% in April. Shipments of finished capital goods followed the same pattern, regaining strength in May after an April lapse.

The U.S. economy’s recovery from the severe downturn of 2008 and 2009 remains slower paced than after past recessions, at about half the rate recorded for other recoveries since World War II. That makes companies cautious about making capital expenditures. Though they’re more willing to spend on automation equipment to increase production without adding to payrolls, they’re still especially reluctant to spend on buildings and even on information processing equipment, including computers. It is easier to fine-tune automated equipment to match variations in customer demand than it is to guess about when to start building a new factory that may saddle a company with productive capacity it ends up not using. The other key factor restraining investment growth is knowledge that consumer purchasing power is strained. Wage and salary growth since the recession has averaged about 2%, too little to fuel robust demand that would call for a surge in business investment.

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

Energy

Last updated: July 14, 2014

By Jim Patterson

Oil markets shrug off Iraqi instability. Despite an ongoing and bloody insurgency in one of the world’s largest oil exporters, traders seem to be betting that Iraq’s flow of crude won’t be interrupted by the chaotic situation in the country’s north. As a result, West Texas Intermediate (WTI), the U.S. benchmark for crude, has slipped to $100 per barrel, from a high of about $108 per barrel shortly after the crisis began.

Prices look set to keep edging lower, as long as Middle East violence doesn’t flare up again. Look for WTI to trade close to $100 per barrel in the near term, and slip a bit further as the summer draws to a close. Gasoline prices will follow suit, with regular unleaded likely to ease slightly from today’s national average of $3.61 per gallon. Ditto for diesel, which figures to decline a few pennies from its current average of $3.88 per gallon.

Still, don’t write off the geopolitical threats to the oil market just yet. Sectarian strife in Iraq is a long way from over, while exports of Libyan crude oil remain well below normal because of internal conflict in that country, as well. Either situation could worsen with little advance warning, with accompanying short-term spikes in the price of crude.

Cooler weather spells benign prices for natural gas customers. The absence of severe heat over much of the country should keep air conditioning usage and electricity demand in check, which in turn means less demand for gas to generate power. At $4.12 per million British thermal units, the price of gas is at the lower end of our expected trading range of $4 to $4.50. Chances are gas will hover close to its current level for much of the summer, unless a strong heat wave perks up demand.

Dept. of Energy: Price Statistics

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Housing

Last updated: July 3, 2014

By Gillian B. White

More expansion is ahead for the housing market during the second half of 2014, after a miserable first quarter but a strong recovery in the second quarter. Both building starts and sales (new and existing) will show additional growth.

For existing-home sales, in particular, the latter half of the year is looking more promising, with the annualized pace of monthly sales picking up to about 5.3 million. That will follow a pace of just 4.7 million in the first half, after brutal winter weather hammered first-quarter sales. Though a big rebound in May sales and growth in the second half will help, that still spells a 1.5% decline in total sales for the year. Head winds include rising home values, slim wage gains, tighter mortgage lending, fewer first-time buyers and less interest from investors. Existing-home sales rose 8.9% in 2013.

After a whopping 18.6% jump in the annualized pace of monthly new-home sales in May, growth will continue, but at a more modest pace for the rest of the year, notwithstanding the usual ebb and flow. By December, we expect the pace of sales to be 3% faster than in May, bringing total new-home sales for the year to about 483,000. That’s a healthy 12% increase over the 2013 total, but more modest than the 17% gain racked up last year and the 20% jump seen in 2012. New homes are staying on the market for an average of just 3.3 months before being sold, still far below the 5.5-month average of the past 30 years.

2014 building starts are likely to total about 1.03 million this year -- an 11% jump from 2013 starts. The rebound from weather-battered low starts in the first quarter came in April, when starts jumped sharply. Thus, a 6.5% decline in May doesn’t signify a softening, and we expect the number of starts to accelerate again in the latter half of the year, as the economy strengthens and building conditions become more favorable.

As for home values, slower sales will moderate the recent strong pace of gains, as will any increase in interest rates later this year. On average, figure on about a 4% gain nationwide for 2014.

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 23, 2014

By Gillian B. White

Look for retail sales growth to slow slightly in the second half of this year, as the torrid pace of motor vehicle sales cools a bit. Retail sales of most goods, however -- from cakes to consumer electronics -- will actually see a small pickup as the economy improves (which will bring positive job numbers, climbing consumer confidence and a likely 4% jump in personal income). What’s more, for the year as a whole, retail sales will likely gain 4%, climbing a bit more swiftly than at last year’s 3.5% pace of growth.

Overall, look for car and light-truck sales to average 16.3 million units this year, up from 15.6 million last year and the best showing for the industry since 2007. Indeed, sales are approaching the average for autos in the years just preceding the recession -- about 16.6 million a year.

For the most part, growth in May was lackluster -- an increase of just 0.3% -- though April sales figures were stronger than first estimated and were revised upward significantly. Building supply and garden equipment stores saw significant gains in May as steadily warm weather encouraged Americans to shop for supplies related to construction, landscaping, gardening and a host of other outdoor activities. Moreover, a strong showing by autos, which climbed 1.4% in May, may mean that many households used up their monthly discretionary budget on down payments, rather than purchases of clothing or dinners out, causing temporary slumps in some spending categories.

Dept. of Commerce: Retail Data

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Trade

Last updated: July 10, 2014

By Glenn Somerville

A gradual pickup in global growth is bolstering U.S. exports, but overseas sales are unlikely to grow enough this year to shrink the trade deficit. One reason: Now that the U.S. economy has shaken off the impact of severe winter weather and begun to regain vigor, imports will climb more strongly. American consumers’ increased appetite for foreign goods, from cars to clothing and luxury items, will more than offset rising foreign demand for U.S. exports. The slight dip in imports in May -- down 0.3% from the April level -- won’t hold up, with shipments of industrial supplies as well as consumer products likely to climb in the months ahead. Monthly exports rose 1% from April to May.

Look for the total 2014 shortfall between exports and imports to roughly match last year’s -- about $476 billion, which was 11% lower than the 2012 trade gap. Even a widening trade gap isn’t necessarily bad news, though. It’s a sign of economic strength: Rising imports reflect stronger consumer and business optimism, which leads to more household and business spending. Meanwhile, manufacturing activity is gaining steam, which promises further increases in overseas sales of American-made goods.

There are some positive signs that economic expansions overseas, notably in China and other parts of Asia, are gaining traction, which should boost demand for American products. But Europe remains stuck in low-growth mode, limiting potential export gains. Energy continues to play a major role in the U.S. trade balance, reducing import needs and making domestic energy costs more predictable. America’s bill for imported oil fell by $2.84 billion in May, as exports climbed by $1.34 billion to $13.12 billion and imports dropped by $1.5 billion to $28.33 billion.

Dept. of Commerce: Trade Data

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