Tool | December 2014
Kiplinger's Economic Outlooks
Last updated: December 1, 2014
By David Payne
After slowing in the fourth quarter of this year, economic growth will pick back up again in 2015. The fourth-quarter pause — with growth slipping to only about a 2% annualized pace, after averaging nearly twice that rate in the second and third quarters — is no cause for concern. It is not uncommon for several strong quarters to be followed by a weaker one, with growth then bouncing back as the economy catches its breath.
Chalk up the softer gains at the end of this year to a variety of factors specific to the fourth quarter; they are not a signal of what’s to come in 2015. For example, motor vehicle production, which grew by double-digit rates in Q2 and Q3, isn’t likely to repeat that performance for a third consecutive quarter. But it is still on an upward trend and will contribute to solid growth next year. And the flat spending on defense that’s likely in Q4 is more of the natural pendulum swing following a whopping 16% pickup in the third quarter than anything else.
Looking ahead, there are plenty of positives on the horizon: 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). Spending on consumer services, such as recreation, is likely to strengthen as incomes rise. Odds are health care spending also will pick up as consumers and providers get used to the new rules. And spending on utilities will stabilize once energy prices stop falling.
Moreover, continued job growth and consumers who feel more secure may trigger more-robust income and spending increases, pushing growth over the 3% mark — if not in 2015, then in 2016. And though there’s a possibility that rising interest rates next year will have a depressive effect, knocking up to half a percentage point off growth, we don’t anticipate that.
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Last updated: December 8, 2014
By David Payne
The good news keeps coming in the job market, pointing to an increase in labor market momentum going into 2015. Expect a pickup in 2015 monthly job gains to 250,000 –- about 3 million for the year. These gains will keep incomes and consumption fueling healthy economic growth.
In November, companies hired 321,000 more workers, the largest one-month gain in nearly three years. Gains were widespread across nearly all industries. A bit of good news for lower-skilled workers is that retail and food service have added 212,000 jobs in the past three months, and that’s likely the reason for the recent strong employment gains among those with less than a high school diploma, especially among women. What’s more, the number of those who are working part-time but would like to work full-time declined for the fifth straight month, and the number of long-term unemployed continued to slide, pointing to real improvement in the labor market.
Look for the unemployment rate to end the year about where it is, at 5.8%, with a gradual decline to around 5.3% likely over the course of 2015. Most of the drop in the unemployment rate will continue to come from reduced numbers of long-term unemployed, as the ranks of those unemployed for less than six months is already near its prerecession level.
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 November for nonsupervisory workers -- about the same as last year. This number could be deceptively low, however, because a large number of retiring higher-earning older workers may be depressing the overall average. In any case, there is little evidence yet of upward pressure in the measure.
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Last updated: December 9, 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-term 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 and bank prime rates of about 0.75% and 10-year Treasuries in the neighborhood of 3.1%, up from about 2.3% at the end of this year.
A series of dampening influences are keeping them from rising faster. Among them is a slowdown in many of the world’s other economies -- the eurozone, Japan and 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 most other currencies. 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 path as 10-year Treasury rates. Now around 4%, rates should follow the Treasury bond rate’s upward move in early 2015. Look for 30-year home loans to end 2015 around 4.5%. 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.
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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.
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Last updated: December 1, 2014
By Glenn Somerville
A gradual pickup in the pace of U.S. economic activity next year will spur stronger investment to expand output, though it will fall short of a spending boom. Figure on about a 7% increase next year in total expenditures on new equipment and facilities to meet both more-vigorous consumer demand for factory-made items, ranging from new cars to home furnishings and appliances, as well as business demand for larger products, such as commercial aircraft and machinery destined for overseas markets.
Though that’ll be a modest jump from the 2014 gain (about 5%), it still falls short of the double-digit annual gains in business spending posted before the Great Recession. While the U.S. economy is securely on track for heftier expansion of about 3% GDP growth next year, concern about weakness abroad and the potential impact that will have on U.S. exports will dampen enthusiasm for spending. Japan is in recession, China’s growth rate is slowing, and Europe is struggling to avoid slipping back into recession.
The main impetus for more capital spending comes from the manufacturing sector. Transportation products in particular will drive the increase. Sales of new cars and light trucks are headed for greater heights — in the neighborhood of 16.4 million to 16.5 million — in 2015. Aircraft makers have backlogs that stretch years into the future, and even railroads are cranking up business — adding locomotives and cars to meet demand for carrying oil, fuel and other petrochemical products.
Moreover, factories are running at 77.2% of capacity (as of October) — far ahead of the low point of 63.9% touched in 2009. Although that’s still short of the 80% mark that is generally seen as a potentially inflation-inducing bottleneck, it is an indication that factories are nearing the point where they must expand to supply increasing demand. That’s confirmed by other indicators of how busy factories are: Monthly shipments of finished goods have crept higher throughout the year. And employment is rising in manufacturing industries.
Don’t be surprised if, when fourth-quarter manufacturing activity is totted up, it shows some softening. After vigorous expansion in the third quarter, demand for some durable goods categories — notably machinery and primary metals — eased in October. It was a surge in demand for defense aircraft that drove orders for all durable goods up in October after two straight monthly declines, and that’s a notoriously volatile category, often with big swings from month to month. There’s no need to worry about a late year lull in growth, though. Unfilled orders continue to grow, and those backlogs will lead to more production in 2015, when economic activity picks up additional steam.
Last updated: December 19, 2014
By Jim Patterson
No letup yet in crude oil’s price slide. At $55 per barrel, West Texas Intermediate (WTI) — the U.S. crude benchmark — is down by nearly half from the peak it hit this summer, when fears of a terrorist takeover in Iraq sent oil prices soaring. Now, markets fear an overabundance of crude as production continues to surge in the U.S., Canada and elsewhere in the face of slowing global demand.
Prices figure to remain volatile in coming weeks. But we see a rebound beginning later this winter, as some energy firms dial back output in response to the lower price and demand perks up a bit. By spring, we look for WTI to trade from $70 to $75 per barrel: still well off the level of recent years, but more palatable for oil exporters and energy firms affected by the severe downturn.
The drop in gasoline prices still has a way to go. Now at $2.45 per gallon, the national average price of regular unleaded is likely to fall to $2.35 or a bit lower around New Year’s Eve.
By the end of winter, though, we expect gasoline to rally a bit, as refiners prepare for heavier spring demand and the annual switchover to summer-blend gas, which costs more to produce. By spring, look for regular gasoline to average about $2.75 per gallon.
Diesel, now at $3.32 per gallon, should follow the same pattern, falling a bit more and then rising to around $3.50 by spring.
Natural gas is also caught up in crude oil’s slide, with the benchmark wellhead price down to $3.50 per million British thermal units (MMBtu). That’s below our expected trading range of $4 to $4.50 for the beginning of winter. But note that usage is up sharply, which has caused stockpiles of natural gas in storage to decline, even as production soars. That trend should continue as winter wears on, meaning natural gas is likely to return to $4 per MMBtu fairly soon, especially if the weather turns colder.
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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.
More from Kiplinger: Housing Outlook , 2015
Last updated: December 22, 2014
By David Payne and Lisa Babb
Look for retail and food service sales to average 5% growth over the 12 months of 2015, similar to the increase in 2014. But the composition of the gains is likely to look different from one year to the next. Sales of most items will rise by 5%-6%, while the pace of growth for motor vehicles will slide sharply from 2014 to 2015. We expect sales of cars and light trucks to total about 16.5 million units in 2015, up only slightly from the 16.4 million sold in 2014. That’s very close to the average for annual auto sales in the years just preceding the recession -- roughly 16.6 million a year. Odds are, unit sales will overshoot that long-term average for a spell in 2016 because there will still be some pent-up demand for autos. And by that time, the economy should be growing more vigorously.
Keep in mind that falling energy prices simultaneously help and hurt retail sales. Lower gasoline prices shave a bit off the overall value of sales and have cut at least half a percentage point from the total this year. But less spending at the pump means more cash available to consumers for other purposes, which boosts sales of other items. And, of course, lower fuel prices bolster sales of gas-hungry SUVs and light trucks. In 2015, the impact of energy prices is likely to be less marked as oil prices plateau or rise slightly.
Despite reports of a disappointing Black Friday, we expect 2014 holiday sales to rise 4.5% over the 2013 season (measuring core retail sales, which exclude gasoline stations, motor vehicles, building materials and food service). In 2013, holiday sales gained just 3.3% over the previous year.
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Last updated: December 8, 2014
By Glenn Somerville
The trade deficit with the rest of the world will widen significantly in 2015 -- by as much as 10%, or twice this year’s increase -- because continuing improvement in U.S. economic performance will make U.S. markets a prime target for foreign producers. U.S. expansion will pick up a notch next year while China loses a step and Europe continues to struggle against slipping back into recession. The differing growth trends are already in place, and, as a result, the dollar is rapidly appreciating against the euro and most other currencies. That’s a double whammy for U.S. exporters: It both drives prices up for foreign buyers of U.S.-made goods and induces U.S. consumers -- now enjoying better job opportunities and at least modest pay growth -- to indulge in more imported products.
Falling global oil prices are a wild card for the U.S. trade outlook: Recent sharp declines that seem likely to last well into 2015 are making the cost of imported crude easier to bear, but they also are crimping the amount that America’s energy companies earn abroad. For example, in October, imports of foreign crude fell fractionally to $26 billion but exports slid 11%, to $11 billion. Still, for the year to date, U.S. exports of oil products are up solidly by 12% and on schedule to hit a record for the full year. More broadly, the overall shortfall between exports and imports with China, always politically sensitive, will widen further in 2015 as Chinese authorities try to undergird their slowing economy by selling more abroad. Deficits with the 18-nation eurozone and with Japan are also certain to deepen in 2015 as those important trading partners try to revive growth. Meanwhile, the dollar is likely to continue to appreciate relative to other major currencies, exerting a slow, lingering drag on U.S. export competitiveness.
The good news: Energy imports are down and will keep falling in 2015 as domestic production ramps up to levels not seen in decades. The U.S. Energy Information Administration projects U.S. crude next year at 9.4 million barrels a day -- the highest output since 1972. That moves the United States another step closer toward energy independence -- with all of the implications that implies for increased U.S. industrial competitiveness -- and will raise pressure on U.S. trade officials to lift a nearly 40-year-old ban on U.S. crude oil exports. Petroleum imports in the first 10 months of this year are 8% lower than in the comparable 2013 period and will decline further next year as domestically pumped product replaces imported oil.