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Tool | August 2014

Kiplinger's Economic Outlooks

2.1% in '14; 3% or better in second half of year
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; 2.3% for the year
Business spending
Spending up 4.5%-5% in '14 as U.S. growth strengthens
Oil trading from $90 to $95/bbl. by December
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


Last updated: August 4, 2014

By David Payne

Expect the economy to maintain a better than 3% rate of growth in the second half of 2014 and into 2015, as the expansion cycle matures and hindrances to growth ease. After a dismal first quarter (a -2.1% growth rate) and a rebound 4% growth rate (annualized) in the second quarter, growth should settle down to a healthy, though not robust, clip for a while. That would mean average GDP this year would be about 2.1% over the average for 2013.

Setting the stage for more-sustained growth: In real terms (adjusted for inflation), disposable income grew at a strong 4.3% annualized rate from December 2013 through June 2014. 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 June hit their highest level in over eight years. And an index of manufacturing purchasing managers’ activity points to strongly expanding output. 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.

What’s more, there’s still a chance that growth will accelerate more dramatically through 2015. 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.

The joker in the deck is the prospect of rising interest rates next year. The Federal Reserve is widely expected to increase interest rates next year. This could have a mild depressive effect, which could knock growth down from above average (better than a 3% rate) to simply average (2.5%).

Dept. of Commerce: GDP Data

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Last updated: August 4, 2014

By David Payne

Higher job growth is here to stay: Another 200,000-plus increase in July (209,000, to be exact) makes it clear that a turning point was reached in February and that the stronger uptrend is well established. Since February, monthly gains have averaged 244,000, a markedly higher rate than the 187,000-per-month average over the previous three years. By year-end, monthly job creation should still be running at about 240,000 a month, with a total of 2.8 million workers added to payrolls over the year.

Don’t expect much improvement in the unemployment rate, however. In July, the rate bumped up -- as we have long expected it would -- as more out-of-workers came back to the labor market to hunt for jobs. Though that caused the labor force participation rate to tick up to 62.9%, the rate remains very low and is likely to climb further as more hiring encourages even more folks to actively seek jobs. Pounding the pavement will bring them back into the fold, once again being counted as officially unemployed, causing the jobless rate to bounce up and down for a while.

It’s good news that gains were spread broadly across most private industries, with only modest declines registered in a handful of industries. The auto industry has responded to the strong growth in auto sales by adding 34,500 workers over the past three months, and dealers added 16,000. Nonhospital health care added 68,300 over this period, and temporary help agencies, 36,900. In addition, local governments increased their hiring.

We expect wage growth to accelerate this year -- a major plus for consumer spending. Pay of nonsupervisory workers -- 83% of the workforce – has increased 2.3% over the past 12 months and will likely pick up to 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: 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: August 29, 2014

By Jim Patterson

The slow descent in gasoline prices continues, with the national average price of regular unleaded down three cents per gallon from mid-August, to $3.44. Odds are, prices will tread water in the near term, and might even climb a penny or two as folks gas up their cars for a Labor Day weekend trip to the shore or the mountains. But look for the downward trend to resume in a few weeks, taking pump prices below $3.40 per gallon by October. Fuel supplies are ample, demand is modest, and refineries will soon be switching over to making cheaper winter blends of gasoline.

Diesel is also ratcheting down a bit. At $3.80 per gallon, the national average price is off about 4 cents from a month ago, and a dime cheaper than this time last year. Look for diesel to near $3.75 per gallon this autumn.

Though the news from the Middle East is grim, crude oil prices remain docile. At $95 per barrel, West Texas Intermediate (WTI), the U.S. benchmark for crude, is continuing in our expected trading range of $90 to $95 per barrel. Unless the fighting in Iraq, Syria or Libya threatens to damage oil fields or disrupt exports, it appears oil traders will continue to shrug off the bloody violence in the Middle East.

As autumn approaches, natural gas prices are perking up, as we expected. At $4.04 per million British thermal units, the benchmark gas price is off its summer lows and back in the trading range of $4 to $4.50 that we’ve been looking for. Natural gas held in underground storage continues to increase ahead of the winter heating season, but the increases won’t be enough to bulk up inventories to their normal, prewinter level. That spells more price hikes ahead, especially if this winter turns out to be colder than average.

Dept. of Energy: Price Statistics

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Last updated: August 15, 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, when brutal winter weather hammered first-quarter sales. In June, existing-home sales climbed 2.6%, topping a pace of 5 million for the first time since October 2013. But despite the uptick in sales and growth in the second half, a 1.5% decline in total sales for the year is likely. Headwinds include rising home values, slim wage gains, tight mortgage lending, fewer first-time buyers and less interest from investors. Existing-home sales rose 8.9% in 2013.

We also expect new-home sales to pick up over the rest of the year from June’s extremely low level. By December, look for monthly sales to be running at a 490,000 annualized rate, bringing total new-home sales for the year to about 445,000. That’s only a 3.3% gain for 2014’s total over the 2013 total, because of the deep winter-weather dip.

In June, new-home sales dropped 8.1%. The dismal performance so far this year may have something to do with lot locations, with many new properties built in less desirable areas. Affordability also likely plays a role. Though inventory remains tight, with new homes staying on the market for only 3.4 months (well below the historical average of 5.5 months), new homes built on poorly located lots are less attractive to homebuyers. In addition, large, high-priced new construction prices out many would-be buyers. An increase in existing-home inventory has offered buyers more options, dampening new-home sales. As the economy picks up and lending to builders increases, more favorable lots should become more accessible.

2014 building starts are likely to total about 1.01 million this year -- an 8.6% jump from 2013 starts. However, all of 2014’s growth will occur in the second half of the year as the economy strengthens and new-home sales pick up; there is little change in first-half starts compared to second-half 2013.

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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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: August 8, 2014

By Glenn Somerville

U.S. exports to the rest of the world are rising, but not fast enough to bring this year’s deficit on global trade down. Too many other areas of the world are struggling with slower growth -- notably Europe, but to a lesser degree China as well -- for the U.S. to repeat the kind of progress made in 2013. Then, the nation’s global trade shortfall contracted by 11%. The best bet for this year: a deficit that matches last year’s $476 billion. But don’t be surprised if it comes in slightly higher, at around $500 billion. The reason is the mismatch between a strengthening U.S. economy, which will draw in more imports, and the softer pace of expansion in much of the rest of the world, which will limit export growth. The dichotomy wasn’t apparent in June, when imports dipped 1.2% and exports edged up by 0.1%, cutting the monthly deficit to $41.5 billion. That proved a temporary reprieve.

A growing U.S. economy, rising consumer and business spending and robust auto sales will drive import volumes up further in the second half. At the same time, it will likely be even more difficult in the second half of 2014 than in the first to ramp up sales of top U.S.-made exports, including industrial supplies, machinery and consumer goods. They are being buffeted by headwinds that range from Middle East unrest to clashes in the Ukraine and heightened tensions with Russia. There’s also a good chance that China will crank up its well-oiled export machinery in a bid to boost its own economy’s performance. Keep in mind, though, that the widening gap reflects not a worsening U.S. economy but an improving one. That does not mean that trade is an economic deterrent, however.

On one significant aspect of trade -- energy imports -- the news is all good and getting better. Petroleum imports in June dropped 3.3%, to their lowest level since November 2010, while domestic oil and gas production continued to increase. The United States is steadily moving toward energy self-reliance and is likely to become a net energy exporter later in this decade. Booming U.S. production not only knocks the import bills down but also provides a growing competitive advantage for U.S. industry and reduces chances that an unforeseen flare-up in geopolitical tensions could trigger the kind of energy price shock that has wounded the U.S. economy in the past.

Dept. of Commerce: Trade Data

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