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Tool | November 2014

Kiplinger's Economic Outlooks

GDP
3.0% growth in Q4 and in '15
Unemployment
5.8% at end '14; 5.3% by end '15
Interest rates
By end '14, 10-year T-notes at 2.5%; 3.2% by end '15
Inflation
1.6% for this year; 1.9% for '15
Business spending
Up about 5% in '14; increasing by 7% in '15
Energy
Crude oil trading from $85 to $90/bbl. by Feb.
Housing
Starts up 20% in '15; new-home sales up 25%
Retail sales
Up 4.5% in both '14 and '15; noncar sales strengthening
Trade deficit
Widening by 5% in '14; 10% increase in '15
Practical Economics columns
Make sense of the latest data and trends.

GDP

Last updated: November 3, 2014

By David Payne

Healthy third-quarter growth of 3.5% plus an upward revision of second-quarter growth confirm that economic momentum is back on track. In the fourth quarter and into 2015, growth should continue at a 3% rate. Consumer confidence has been gaining strongly. Hiring is on the rise, job openings are at a near record level, and layoffs are scarce (indicated by a very low rate of initial unemployment claims since May). Motor vehicle sales are still on an upward trend, though the really strong gains are probably over. Spending on consumer services, such as recreation, is likely to strengthen as incomes rise. Odds are health care spending will pick up as consumers and providers get used to the new rules. And spending on utilities will stabilize once energy prices stop falling.

And there’s more potential for an upside surprise than a downside slide. As job growth returns and consumers feel more secure, more-robust income and spending increases may well be triggered, pushing growth over the 3% mark. Even if the momentum isn’t great enough for that to happen in 2015, it’s a good bet that it will be by 2016. At the same time, there’s a smaller risk that rising interest rates next year will have a mild depressive effect, knocking a half a percentage point or so off annual 2015 growth. If that did happen, growth would slip from the expected above-average pace of better than 3% to a simply average rate of 2.5%. For now, however, we expect that the likely increase of a half percentage point in rates won’t have much impact on GDP growth. The other downside risk — a lengthy slowdown in Europe’s growth — would hurt U.S. exports. But again, the impact on the broader economy would probably be minimal.

Dept. of Commerce: GDP Data

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

Employment

Last updated: November 18, 2014

By David Payne

That the unemployment rate fell in October is good news. That it fell for all the right reasons is very good news for the coming year. Over the past year, a good part of the decline in the unemployment rate resulted from shrinkage in the labor force, as laid-off workers became too discouraged by not finding new jobs and dropped out, discontinuing their hunt for work. But in October, a large group of them reentered the labor force and a significant number of them found jobs. Thus, the decline in the jobless rate, combined with the uptick in the labor force, spells more strength than a simple drop in the unemployment rate indicates. Moreover, the October gain of 216,000 net new jobs represented the ninth consecutive month with a gain of more than 200,000.

Monthly job gains are likely to continue to top the critical 200,000-a-month benchmark through 2015. 200,000 is roughly the number of job gains needed to keep incomes and consumption fueling healthy economic growth. Further gains in retail, health, food service, professional and business services, and temporary help hiring are all likely. Moreover, job openings are continuing at a very high level.

Look for the unemployment rate to end the year about where it is, at 5.8%, and gradually decline to around 5.3% by the end of 2015. The number of long-term unemployed will also continue to decline steadily, though it will still take several years for that figure to get back to prerecession levels.

Meanwhile, wage growth is likely to bump up a small amount in 2015, to 2.4%. It remained at a steady 2.2% rate in October for nonsupervisory workers — about the same rate as last year. This number could be too low, as a large number of retiring higher-earning older workers could be holding down the overall average, but there is not much upward movement in this measure as of yet.

Dept. of Labor: Employment Data

More from Kiplinger: Wages to Rise: More for Some than Others

Interest Rates

Last updated: November 7, 2014

By David Payne

Higher interest rates are coming, no doubt. We look for the Federal Reserve to bump up short-term rates at some point in the latter half of 2015. But Fed Chair Janet Yellen’s strong pro-growth stance — based largely on concerns about full recovery in the labor market — suggests that the move will be neither sharp nor precipitous, but well heralded and gradual.

Long rates are likely to jump some months before that happens, however — possibly by as much as half a percentage point. When investors begin to sense that a move by the Fed on short-term rates is imminent, nervousness about the impact will push long rates higher, just as anxiety about an imminent reduction in the Fed’s monthly bond buying binge kicked bond yields higher in mid-2013. But just as rates stabilized once the tapering off of the bond buying actually began, they will do so again once it becomes clear that the Fed won’t jerk rates sharply higher. By the end of 2015, figure on a federal funds rate of about 0.75% and 10-year Treasuries running in the neighborhood of 3.2%, up from about 2.5% at the end of this year.

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, Japan, China. That’s serving to deflect investments from those areas toward the U.S. economy. Similarly, the relative strength of the U.S. economy is nudging up the value of the U.S. dollar versus the euro, the yen, and to some extent, the yuan. That’s helping to hold down expectations of inflation and exerting downward pressure on rates. Moreover, with expectations of inflation in Europe and Japan also very low, fixed-income investors are flocking to the U.S. for better yields. And finally, banks in the U.S. are buying more Treasury securities to meet requirements for quality capital reserves.

Long rates could rise even less than expected in 2015 if long-term inflation expectations stay low. While it’s virtually guaranteed that the Fed will raise short-term rates, long rates may not move in lockstep with short rates. If the strengthening economy has little effect on prices, causing investors to judge that inflation is likely to remain low for years to come, long rates will rise less than short rates do, flattening out the usual yield curve.

Rates for 30-year fixed-rate mortgages will follow the same pathway as the 10-year Treasury rate. Now around 4.0%, rates should edge slowly toward 4.2% by the end of this year. Then, they’ll follow the Treasury bond rate’s upward move in early 2015. Look for 30-year home loans to end 2015 at around 4.7%. By historical standards, that’s still 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, and the effect on home buying may be more pronounced than would have been expected in the past.

Federal Open Market Committee

More from Kiplinger: Next Rise in Interest Rates Will Come in 2015

Inflation

Last updated: November 26, 2014

By David Payne

Expect consumer prices to rise just a bit less than 2% over the twelve months of 2015, a slightly faster pace than the 1.6% increase likely to be racked up over 2014. The pickup in overall inflation will occur because gasoline price declines will no longer offset increases in other prices. Gasoline prices aren’t likely to rise much from their current low level, however, and that will help hold the inflation rate down. Food prices, especially for meat, will remain high for a while, but the upward pressure should ease in 2015 and prices should eventually decline.

Prices excluding food and energy, often called the “core” rate of inflation, will rise by about 1.8% next year…roughly the same as this year. (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.) We expect shelter costs to continue to rise at a 3% rate, faster than overall inflation, because rents — used to calculate CPI shelter costs — are rising 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 rates fast enough.

Dept. of Labor: Inflation Data

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Business Spending

Last updated: November 5, 2014

By Glenn Somerville

Capital spending to boost output will gain momentum next year, despite headwinds caused by slow growth in Europe and China. Steady U.S. expansion will help persuade businesses to up their investment spending by about 7% in 2015 from around 5% this year. Compared with the double-digit annual gains seen before the Great Recession, that’s still not a robust investment pace. But it does put spending on a sharper upward trajectory that will steepen further as manufacturers gain confidence about economic expansion in the U.S. Overseas demand remains iffier, clouded by geopolitical concerns as well as by slower growth — and the risk that Europe will even slip back into recession briefly.

A healthy U.S. manufacturing sector, likely to gain even more strength in 2015, is creating impetus to invest. New-car sales and production are at lofty levels, and a variety of other industries, including aerospace and aircraft manufacturing, are racking up hefty order volumes that will keep factories busy well into next year and possibly beyond. Plants are already running faster to keep up; manufacturers were operating at 77.3% of capacity in September, compared with the low of 63.9% touched in 2009. With capacity utilization approaching 80% — typically seen as a point when inflation becomes a concern — and overall economic growth likely to increase to an annual pace of at least 3% next year, there’s reason to expect investment to pick up. Shipments of finished goods, which offer a handy rule of thumb for how busy factories are on a day-to-day basis, rose slightly in September and climbed strongly over the course of the July-September third quarter — a promising sign for both investment and exports.

Investments in new plants and equipment are typically big-dollar commitments, undertaken over a period of time, so corporate managers are likely to make decisions soon. Because interest rates are likely to head up, that’s especially true if corporations intend to borrow to finance expansions.

Note that although new orders for costly durable goods weakened for two successive months in August and September, the drop-off isn’t cause for concern. It was largely the result of a decline in aircraft orders, which tend to come in batches and for large dollar amounts. We expect the soft patch to be temporary, with airlines and other industries benefiting in 2015 from an improved tempo of overall business activity.

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

Energy

Last updated: November 26, 2014

By Jim Patterson

Motorists can be thankful for cheaper fill-ups at the pump this Thanksgiving weekend. Regular unleaded, now averaging $2.81 per gallon nationally, is off another three cents from the end of last week. And with oil prices still weak, odds are good that travelers will see prices fall at least another penny or two this holiday weekend, despite heavier-than-usual demand for gas. By mid-December, the national average figures to decline a bit more, to roughly $2.75 per gallon: the lowest level since September 2010.

Even diesel is slipping a bit, down a penny from last Friday. However, we look for diesel to recover and move a bit higher this winter as demand for chemically similar heating oil heats up.

Crude oil prices remain under downward pressure, now that traders are discounting the possibility that OPEC and other big oil-exporting nations will work together to cut production and prop up prices. West Texas Intermediate (WTI), the U.S. crude oil benchmark, slipped to about $74 per barrel on such suspicions. Barring some bad economic news that would weaken global oil demand, we look for WTI to hover near these levels in coming weeks before gradually climbing toward $85 per barrel by late winter.

Natural gas prices continue to benefit from colder-than-normal weather across much of the country. At $4.41 per million British thermal units (MMBtu), the benchmark gas price is holding in our expected range of $4 to $4.50. Unless the winter proves unseasonably warm — which isn’t looking likely at this point — we expect the benchmark price to edge up slightly by spring, to about $4.75 per MMBtu.

Dept. of Energy: Price Statistics

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Housing

Last updated: November 3, 2014

By David Payne

With the exception of the building and sale of new single-family homes, the housing market is finally nearing normal. Sales of existing homes in 2015 are likely to match or exceed what would have been considered average before the housing boom of the last decade (1999-2002), and the strong rental market has pushed multifamily construction back to normal levels. New-home construction and sales, however, are still at about 50% of pre-bubble levels and will not recover fully until 2017, at least.

With income and employment rising, demand for housing will increase. Other positives include a million more potential home buyers than usual — the backlog of young adults still living with their parents in the wake of the recession — and easing credit conditions. Down payments for Fannie and Freddie qualifying mortgages have recently been reduced from 5% to 3%, for example, and mortgage lenders are extending credit to borrowers with somewhat less desirable credit scores. Half of mortgage lenders expect improved access to credit for lower prime borrowers (with FICO scores of 620 to 720) over the next six months. Currently, about half of mortgages go to borrowers with FICO scores below 740, up a bit from the 40% level of 2013.

New-home sales will rise a healthy 25% in 2015 after only a 4% rise in 2014, but that will still put yearly sales at just 560,000, well below the pre-bubble norm of 900,000. Though problems on both the demand and the supply sides are easing, they remain a constraint. First-time buyers‘ difficulties attaining credit continue to crimp demand, while builders are still struggling to build enough new homes to sell. There’s a shortage of skilled tradesmen, such as carpenters and framers, because many found jobs outside the housing sector when the housing market crashed and construction dried up. Because it takes between 15 and 36 months to develop land and get lots over the various regulatory hurdles, the supply of build-ready lots has fallen short of needs as demand has picked up. In addition, bank lending for the development of raw land remains tight, although lending for construction has become somewhat easier.

Look for housing starts to pick up 20% in 2015, to 1.2 million, after an increase of 7% in 2014. We expect existing-home sales to increase by 8% in 2015, to 5.35 million units, after declining 2% in 2014 from a strong upward bump in 2013.

As for home prices, increases will continue to moderate from the big jumps in 2012 and 2013. We look for an average gain in the neighborhood of 3.5% in 2015, following an expected 4% increase this year. The sharp rebounds after the housing bust of last decade 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

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Retail

Last updated: November 7, 2014

By David Payne

Look for retail and food service sales to average 4.5% growth over the twelve months of 2015, similar to the increase in 2014. The composition of next year’s gains is likely to look different than this year’s, however, with sales of most items rising 5%, but a much reduced pace of growth for motor vehicles than in 2013 and 2014. We expect car and light-truck sales to total about 16.5 million units in 2015, up slightly from 16.3 million in 2014. Sales are nearing the average for autos in the years just preceding the recession — roughly 16.6 million a year. Because there is likely still some pent-up demand for autos remaining following the recession, unit sales will probably overshoot their long-term average for a spell. Odds of such a bump in 2016 are good; by that time the economy should be growing more vigorously, spurring more families to trade in the old jalopy for a newer model.

Meanwhile, piggybacking on the improved economy next year, sales of most items will rise 5%. Food service and accommodation sales, in particular, should grow strongly, at about a 6% rate. Falling gasoline prices shaved at least half percentage point from overall sales this year. Next year they will plateau or possibly rise a little.

We also expect a rosier holiday season at the end of this year than in 2013 — about a 4% increase in core retail sales (all except gasoline station, motor vehicle, building materials and food service sales) over the season. In 2013, holiday sales gained just 3.3% over the previous year.

Dept. of Commerce: Retail Data

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Trade

Last updated: November 19, 2014

By Glenn Somerville

Brace for a 10% widening in the U.S. trade deficit, to about $550 billion in 2015, twice the 5% increase anticipated for all of 2014. The nation’s trade performance will get a one-two punch from stronger U.S. economic growth outstripping that of its trade partners. Exports will suffer, as the appreciating dollar makes U.S. goods and services more costly for foreign buyers. Imports, on the other hand, will climb, as the stronger greenback stokes American consumers’ desire for foreign-made consumer and luxury goods by making them cheaper to buy.

Already, the latest monthly trade statistics (for September 2014) show exports at a five-month low: down 6.5% to the European Union, 3.2% to China and 14.7% to Japan. Meanwhile, consumer goods imports are at record levels. Those imports include Apple’s new made-in-China iPhone 6, introduced in September. The shortfall between exports and imports in the first nine months of 2014 is 3.9% higher than in the first three quarters of last year and will keep widening during 2015. That’s partly because there is a significant lag time between when currency appreciates and when the full impact of the increase hits exports. But we also expect the dollar to continue to increase in value relative to other major currencies, acting as a brake on U.S. export competitiveness.

The eurozone economy — cumulatively second in size only to the United States — continues to falter, and there is concern that the 18-nation euro area could slip into a third recessionary dip. Asia is struggling as expansion slows in China and as Japan strives to pep up its economy. Latin America’s most important economy, Brazil, is in an economic slide that is pulling industrial production down as its newly elected government tries to come to grips with worsening inflation. The upshot? None of the globe’s major trade regions will be eager customers for U.S.-made goods in 2015.

On a positive note, energy imports are likely to continue to slide, while energy-related exports rise. Falling global oil prices are shrinking the nation’s energy bill at the same time that increased production from shale is paying off, reducing the need for energy imports and increasing exports of natural gas. Petroleum imports in September were the lowest since November 2009, and they’re down 7.5% so far from the comparable first nine months of 2013.

Dept. of Commerce: Trade Data

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