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Tool | September 2014

Kiplinger's Economic Outlooks

3.5% in Q3; 3.0% in Q4 and '15
Bouncing around; about 6.1% by end ’14
Interest rates
By end '14, 10-year T-notes at 2.8%; 3.5% by end '15
More moderate in second-half '14; 1.8% for the year
Business spending
Spending up 4.5%-5% in '14 as U.S. growth strengthens
Oil trading from $90 to $95/bbl. through December
Housing sales
12% gain for existing-home sales in second-half '14
Retail sales
5% growth in '14, slower after auto sales level off
Trade deficit
Unchanged from '13; U.S. growth pulling in more imports
Practical Economics columns
Make sense of the latest data and trends


Last updated: September 15, 2014

By David Payne

The economy looks better than was previously thought: Look for about 3.5% growth at an annual rate in the third quarter, driven by motor vehicle sales, business equipment, exports and nonresidential construction. A likely upward revision of second-quarter growth to near 5.0% after a dismal first quarter (a -2.1% growth rate) is also likely. In the fourth quarter and into 2015, growth should settle down to a 3.0% rate. That would mean average GDP this year would be about 2.2% over the average for 2013.

Setting the stage for more sustained growth in coming months: After wringing out inflation, disposable income grew at a strong 4.0% annualized rate from December 2013 through July 2014. Consumer confidence is at its highest level since before the recession. Motor vehicle sales in July hit their highest level in over eight years. An index of manufacturing activity points to strongly expanding output. New orders for business equipment have climbed 13 percent at an annual rate since May, indicating strength in business investment spending. Plus, hiring is on the rise, layoffs are scarce (indicated by a very low rate of initial unemployment claims since May), and retail sales have rebounded.

And growth may accelerate more dramatically through 2015. Improving business confidence could push investment growth back up. Consumer spending and confidence remain 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.

There is a slight possibility that rising interest rates next year could have a mild depressive effect, knocking growth down from an above-average (better than a 3%) rate to a simply average (2.5%) pace. For now, however, we expect that the likely small increase of a quarter- or half-percentage point in rates won’t have much impact on GDP growth.

Dept. of Commerce: GDP Data

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


Last updated: September 8, 2014

By David Payne

Monthly job gains are still likely to top 200,000 for the rest of 2014, despite a lower-than-expected increase of 142,000 in August. Several onetime factors played a role: a grocery store strike in the Northeast (since settled), and changes in hiring patterns at motor vehicle manufacturers. Some weakness in retail jobs might also be explained by quirky patterns in temporary summer help.

The disappointingly low August hiring report contained some good news that will undergird better numbers later. First, the number of long-term unemployed dropped again, by 192,000. In fact, the number has declined steadily to 3 million since peaking at 6.8 million in 2010. Though this is still above the normal rate of about 1.5 million, the swift decline indicates that fears of a large permanent unemployable group of workers may have been overstated.

Second, wages of nonsupervisory workers rose 2.5% over the past 12 months, much better than the 2% rate of inflation over the same time. Because such workers are at the lower end of the pay scale and a higher percentage of their pay is spent quickly, a jump in their wages tends to have a faster impact on consumer demand and economic growth than an increase in the earnings of supervisors and plays a key part in keeping an expansion going.

As for the unemployment rate, it declined from 6.2% to 6.1% both because there were fewer long-term unemployed and because there was a drop in labor force participation, particularly by teenagers. Fewer than usual entered the labor force in August, looking for work, and more than usual left the labor force during August, presumably to go back to school (or to grab what was left of summer vacation before hitting the books again). The result, in both cases, was a lower labor force participation rate, which helped lower the unemployment rate. Note that the labor force participation rate for those over the age of 25 rose in August.

Dept. of Labor: Employment Data

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

Interest Rates

Last updated: August 15, 2014

By David Payne

By the end of the year, 10-year Treasury rates will likely be running around 2.8%. That’s a bit shy of the 3% rate we had been expecting, based on the strengthening economy and the likelihood that investors would nudge rates higher in anticipation of tighter monetary policy from the Federal Reserve. A flight to the safety of bonds in view of multiple geopolitical crises around the world -- in Ukraine, Iraq and Gaza -- is bolstering bond prices and depressing interest rates worldwide. Indeed, the move has been strong enough to wipe out any upward effect on interest rates from the recent report of strong second-quarter GDP growth, as well as from continuing reductions in Federal Reserve bond purchases. The current 10-year rate is 2.4%, more than half a point lower than at the end of 2013.

Eventually, upward movement will prevail, but the timing is uncertain. Fed Chairman Janet Yellen’s strong pro-growth stance, primarily based on concerns about full recovery in the labor market, suggests that the Fed will hold off raising short-term interest rates this year -- even in the face of a strong rebound in second quarter and continued strengthening in GDP in the second half. But the Fed will have to tighten at some point in 2015.

When investors sense that a move by the Fed is imminent, long-term rates may jump by as much as half a percentage point, probably in early 2015. Similar nervousness jolted rates higher in mid-2013, when it became clear that the Fed would soon scale back its monthly bond-buying binge. But just as rates stabilized once the taper actually began, anxiety about hiking the short-term interest rate will fade as investors absorb the initial adjustment. By the end of 2015, figure on a federal funds rate of about 0.75% and long-term Treasuries running in the neighborhood of 3.5%.

Rates for 30-year fixed-rate mortgages will follow suit. Now around 4.1%, rates will edge slowly toward 4.4% by the end of this year. Then they’ll follow the Treasury bond rate’s upward move in early 2015. Thirty-year home loans should end 2015 at around 5.1%, still low by historical standards.

Federal Open Market Committee

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Last updated: August 29, 2014

By David Payne

Look for inflation to moderate in the second half of 2014, sliding to a 2.0% annualized rate from 2.6% in the first half. Pressure on food and energy costs, which surged in the first half, will ease somewhat. Beef and pork prices won’t rise as quickly as in the first half of the year, when an outbreak of a virus reduced pork supplies, and sharply reduced cattle herds in the wake of last year’s drought sent beef prices soaring. Though meat (and chicken) prices are likely to remain high for some time until supplies are replenished, the tab for other foods is likely to slide somewhat.

Meanwhile, gasoline prices, which jumped in June, have begun to decline a bit as the Middle East crisis grinds to another standstill. Similarly, prices for natural gas and electricity, goosed higher in the early months of the year by harsh winter weather, will flatten or decrease a bit in the second half of the year.

For the year as a whole, we expect inflation to run at about 2.3%, measuring December 2014 over December 2013. That’s up from a 1.5% rise in 2013, and reflects higher average prices this year for food, energy and shelter. Shelter costs are running at 3% this year in the Consumer Price Index because they are assumed to reflect rents, which have picked up.

Excluding the more-volatile categories of food and energy, however, the Consumer Price Index is likely to continue to climb at a moderate 1.9% annual rate in the second half. This so-called core rate of inflation, which is considered a better reflection of underlying systemic inflation, rose at a 2.1% clip (annualized) in the first six months of 2014, up from a 1.7% rate in 2013.

Core consumer prices in July moved in line with recent trends, indicating that there is not yet a broad pickup in price pressures. The ability of the Federal Reserve to maintain low interest rates depends on good behavior by the inflation numbers. Otherwise, financial markets will begin to worry that the Fed may risk losing control of inflation unless it acts more aggressively.

Dept. of Labor: Inflation Data

More from Kiplinger: Print-Ready Consumer Price Index Chart

Business Spending

Last updated: August 29, 2014

By Glenn Somerville

Businesses are gradually ratcheting up spending on new equipment to boost production as second-half economic momentum builds. Spending will rise by 4.5% to 5% this year, a significant improvement from the meager 1.5% gain posted during 2013. Next year, the spending pace will gather more speed. We anticipate a 7% gain in 2015 spending. While still well short of the double-digit annual increases on equipment spending posted before the Great Recession struck, it is evidence that companies are growing more confident about committing to big expenditures for adding capacity to meet growing demand.

Factories are getting busier, notably in industries such as auto making and aircraft construction, increasing the incentive to expand operations. Businesses ran at 79.2% of capacity in July, still about a percentage point below the historical average, but at a level that implies some industries are nearing production limits. The likelihood that interest rates will start rising next year -- in response to stronger growth and rising price and wage risks -- may also play into corporate planning and move some projects and equipment purchases forward to keep costs down. Core capital goods orders that exclude aircraft and are considered a proxy measure for business investment eased slightly, by 0.8%, in July, but that followed a big 5.4% jump in June. The more telling gauge for factory activity: core shipments of finished goods, which jumped 1.5% in July on top of a 0.9% June pickup. Shipments of core capital goods are used to calculate equipment spending in the government’s GDP report, so June and July’s back-to-back monthly gains put business spending on solid footing entering the second half of this year.

Recovery has been choppy and uneven since recession ended in mid-2009, but growth is accelerating. GDP expanded at a robust 4.2% pace in the second quarter, bouncing back from a weather-induced 2.1% rate of decline in the first three months of the year. That puts the economy on track for growth of 2.1% this year, picking up to 3% in 2015 -- enough to dispel at least some of the corporate caution that has kept a damper on spending. Automation equipment, including programmable robots, remains the most obvious area for increased investment. The quickest way to boost productivity, or output per worker, is to boost computer-controlled and machinery-generated output while keeping payrolls in check. Restraint has its limits, though: More automation means fewer workers on factory floors and lean pay raises -- about 2.5% in 2015, just a tad more than this year. Stronger growth in incomes is needed to sustain increases in demand. Monthly hiring now is picking up, but consumer spending power remains strained and unable to fuel a prerecession-level surge in business equipment spending.

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


Last updated: September 19, 2014

By Jim Patterson

Look for gasoline pump prices to continue to slide. The national average price of regular unleaded gas is down another nickel this week, to $3.36 per gallon; it could hit $3.30 by the end of September -- even lower than we were expecting just a few weeks ago.

Diesel is also trending down, to $3.77 per gallon from $3.79 a week ago. More slow price drops are on the way, with diesel likely to average $3.75 per gallon by October.

Fueling the moves south: cheaper oil. Forecasts of growth in global crude-oil demand were ratcheted back in recent weeks, while U.S. oil production rose to nearly 9 million barrels per day, its highest level since 1986. In a surprising move, OPEC announced that it might cut back production next year to underpin prices. But even that announcement couldn’t keep West Texas Intermediate (WTI), the U.S. crude benchmark, from dropping a bit more, to $92.60 per barrel

A worsening of the violence in Iraq, Syria, Libya or any of the other trouble spots in the Middle East could cause brief jumps in oil prices, but would be unlikely to reverse the overall downward trend.

The price of natural gas is edging up slightly on cooler weather. At $3.86 per million British thermal units (MMBtu), the benchmark wellhead price is up a tad from a week ago. And earlier this week, natural gas actually managed to rise briefly above the $4- per-MMBtu level. Odds are, prices will soon return to that level, as more homes and businesses switch on furnaces in coming weeks, putting an end to the recent gains in gas stockpile levels.

We look for natural gas to trade from $4 to $4.50 per MMBtu this fall, and then move a bit higher over the course of the winter.

Dept. of Energy: Price Statistics

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Last updated: September 19, 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 will show additional growth, though new-home sales growth will languish.

For existing-home sales, in particular, the latter half of the year looks promising, with the annualized pace of monthly sales picking up to about 5.3 million. That’s up from just 4.7 million in the first half, when brutal winter weather hammered sales early in the year. In July, existing-home sales climbed 2.4% from the previous month. Even so, total sales for the year will decline by about 1.5% from 2013 levels. The headwinds…including rising home values, slim wage gains, tight mortgage lending, fewer first-time buyers and less interest from investors…just won’t allow the sales to grow enough in the second half to make up for the dismal early-year sales.

Look for new-home sales to pick up over the rest of the year as well. By December, monthly sales will be running at an annualized rate of about 490,000, bringing total new-home sales for the year to about 445,000. Still, that’s only a 3.3% gain for the year, held down largely because of the deep winter-weather dip.

The lousy performance so far this year may have something to do with lot locations, with many new properties built in less desirable areas. Though inventory remains tight -- with new homes staying on the market for two months less than the historical average of 5.5 months -- new construction on poorly located lots is less attractive to home buyers than existing homes. As the economy picks up and lending to builders increases, more favorable lots should become accessible, easing some of that problem, but affordability also likely plays a role. High-priced, large new homes are out of reach for many would-be buyers, and an increase in existing-home inventory is offering buyers more options.

As for building starts, they’re likely to wind up at about 1 million this year, up nearly 8.5% from 2013, with most of the growth in the second half of the year. That began with a bang: a 22.9% gain for starts in July. The 14.4% decline that followed in August represents mainly volatility in starts in the multifamily sector, which dropped by more than 30%. Starts of single-family homes declined by only 2.4%.

Home values will likely average about 4% higher than in 2013 and add another 3% in 2015. The strongest gains will happen along the West Coast and in urban areas in the Southeast.

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

More from Kiplinger: Housing's Revival Losing Some Heat


Last updated: August 15, 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. However, retail sales of other goods -- ranging from cakes to consumer electronics -- will experience a small pickup as the economy improves. Improved job growth, climbing consumer confidence and a likely 4% jump in personal income will all feed consumer spending. 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. Sales are approaching the average for autos in the years just preceding the recession -- about 16.6 million a year. In fact, they exceeded that pace during the first half of the year, peaking at an annualized monthly pace of 16.9 million. After declining to a pace of about 16.4 million in July, monthly sales are likely to fluctuate in the mid-16 million range for the rest of the year.

Overall July retail sales were flat, with gains from miscellaneous retailers, health stores, building supply stores, restaurants and clothing stores offset by declines for motor vehicle sales, furniture stores and department stores. Note that online sales are going through another growth spurt this year after slowing in 2013, and are now 8.3 percent of total retail sales.

Dept. of Commerce: Retail Data

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Last updated: September 8, 2014

By Glenn Somerville

U.S. exports are rising modestly, but storm clouds gathering over key markets will limit progress on cutting the trade deficit both this year and next. Slowing economies in Europe, Japan, China and Brazil mean the United States won’t be able to shrink the gap between imports and exports as it did in 2013. Furthermore, it will become even more difficult to do so in 2015 as the U.S. dollar strengthens and growth outside the U.S. continues to slow.

The best-case scenario for 2014 is matching last year’s trade deficit of $476 billion (down 11% from 2013). But a more likely outcome is that the full-year deficit will rise to around $500 billion. With the U.S. economy performing much more strongly than those of its trade partners, it will draw in more imports while making it more difficult to boost sales overseas. So far in the first seven months of 2014, growth in cumulative imports at 3.4% is only slightly outstripping the 3.1% increase in exports (which are much smaller than imports to begin with). What’s more, the difference in growth rates will likely widen later this year and in 2015.

In fact, the relatively stronger growth rate for the U.S. economy versus those of Europe and Asia may well make the United States a target for overseas trade partners seeking to bolster their own economies by selling more into U.S. markets. The increasing strength of the U.S. dollar against other currencies, such as the euro, up the odds of that likelihood by effectively making imported goods cheaper for U.S. consumers and U.S. exports more costly for foreigners to buy. The U.S. manufacturing sector, which has been growing strongly, will find it harder to keep boosting sales overseas, especially if economic and political conditions there worsen. Makers of aircraft, pharmaceuticals, chemicals and medical equipment, among others, will find it tougher to sell abroad.

Energy remains a bright spot for the nation’s trade performance. Although petroleum imports ticked up 10% in July from a month earlier, the longer-term trend is downward as domestic oil and gas exploration and production keep rising. In the first seven months of 2014, petroleum imports are down 4.5%, to about 2 million barrels, as swelling domestic production hits the market. That provides multiple economic benefits: a competitive advantage for U.S. industry as the country moves toward energy self-reliance; less risk of future oil price shocks if overseas hot spots turn into geopolitical crises; and a continuing decline in the bill for imported oil.

Dept. of Commerce: Trade Data

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