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Tool | July 2015

Kiplinger's Economic Outlooks

GDP
3%-3.5% in second-half '15; 2.5% for the year
Unemployment
Falling to 5.1% by end '15
Interest rates
By end '15, 10-year T-notes at 2.5%; mortgages, 4.2%
Inflation
1.6% for '15, up from 0.8% in '14
Business spending
Increasing by 4% in '15, vs. 5% in '14
Energy
Crude oil trading from $55 to $60/bbl. by September
Housing
New-home sales rising 22% in '15, 23% in '16
Retail sales
Up 4.5% this year, excluding gasoline sales
Trade deficit
Widening by 10% in '15
Practical Economics columns
Make sense of the latest data and trends.

GDP

Last updated: July 14, 2015

By David Payne

Look for the U.S. gross domestic product to show a healthy gain of about 3% for the second quarter when the government reports the quarterly results on July 30.

The second-quarter rebound from the weather-related decline in GDP during the first quarter, along with our expectation for 3% to 3.5% growth in each of the final two quarters of the year, will put GDP growth for 2015 at 2.5%, a tick above last year’s 2.4% pace.

Consumer spending for motor vehicles and other goods and services is playing a big role in fueling the economic resurgence, along with a ramping up of construction activity, including home building. The housing market is in for a solid year, propelled by increased hiring and rising wages plus an increase in household formations and pent-up demand.

The economy so far this year is following last year’s script. Last year’s slow start, also largely resulting from harsh winter weather, was similarly followed by healthier gains in GDP in each of the three subsequent quarters.

The biggest drag on U.S. growth going forward? Exports, which will continue to be hampered by the strong U.S. dollar, which makes U.S. goods and services pricier and less competitive in foreign markets. The prospect of a further slowdown in Europe, should Greece exit the eurozone, and the slower-growing economy in China won’t help much, either, on the export front.

Dept. of Commerce: GDP Data

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Employment

Last updated: July 2, 2015

By David Payne

Good job growth of 223,000 in June bodes well for economic growth going forward. Strong gains continued in health care, retail, food service and business services. However, downward revisions to April and May job-growth numbers provide a dash of caution, indicating that the labor market is not close to overheating. So, though we still expect the Federal Reserve to raise short-term interest rates by a quarter-point in September, the simmering, rather than boiling, labor market gives the Fed breathing room to wait until next year before raising rates a second time.

Look for the unemployment rate to finish the year at 5.1%. The rate dropped to 5.3% in June, largely because many people that have been out of work for six months or longer gave up and stopped looking for work, thereby lowering the official unemployment number. That means the job market is not quite as tight as the official unemployment rate would imply.

Dept. of Labor: Employment Data

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Interest Rates

Last updated: July 17, 2015

By David Payne

Long-term interest rates will remain volatile in the short run, but should end the year at about 2.5%, just a bit above where they are now. Competing influences have been whipsawing rates recently. On one hand, uncertainty about the eurozone and doubts about China’s growth are adding downward pressure as more investors seek the safety of U.S. Treasuries. On the other hand, anticipation of an imminent rate hike by the Federal Reserve and improving growth in the United States and Europe add upward pressure.

We also expect 30-year fixed-rate mortgages to wind up at 4.2% at the end of 2015, versus 4% now.

Despite the short-term fluctuations, here are a handful of reasons why long-term interest rates should stay relatively low for a while:

● Uncertainties about Greece staying in the eurozone will persist for the rest of the year. Every hiccup will push more investors toward the safety of bonds from major economies.

● Consumer prices in the U.S. are unlikely to rev up much anytime soon.

● European interest rates are likely to stabilize as investors realize that the European Central Bank will stay on its expansionary path, despite improving growth in Europe. The ECB intends to keep buying 60 billion euros’ worth of bonds a month until September 2016, a substantial share of the Eurobond market.

● The Fed won’t want to widen the interest rate gap between the U.S. and Europe, lest it be blamed for a bigger rise in the value of the dollar than has already occurred.

● China’s growth is likely to continue slowing, keeping its central bank committed to expansion.

We still expect the Federal Reserve to bump up short-term rates by a quarter-point in September, but odds are that a second boost won’t come until January.

Federal Open Market Committee

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Inflation

Last updated: July 17, 2015

By David Payne

Look for a moderate inflation environment well into next year. Price pressures will pick up eventually, but very gradually. Wages have been slow to rise despite falling unemployment, and costs of many materials, such as paper and steel, have been dropping.

Overall consumer prices should rise by 1.6% during the calendar year, about double the exceptionally low 0.8% increase in 2014. Higher gasoline prices are behind the bump up.

The core inflation rate, which excludes food and energy prices, will rise by about 2.2%, compared with a 1.6% increase last year. That increase will be roughly in line with an expected 2.5% pickup in wages this year, from 2% last year.

The core rate is typically seen as a more accurate gauge of underlying inflation because of the volatility of food and energy costs. While total price inflation will stay below 2% until 2016, the Federal Reserve may use the jump in core inflation to justify an interest rate hike in September. Its rationale would be that core inflation represents the persistent part of inflation that it wants to limit.

The strong dollar will limit price increases of commodities because U.S. manufacturers are paying less for raw materials and are competing against lower-valued imports.

Prices for services and prescription drugs will rise the fastest in 2015. Medical services costs will go up about 3%, while prescription drug costs will increase about 4%. The cost of shelter will continue to rise above a 3% rate because rents are climbing. That trend will continue for at least a year until housing sales improve and demand for rental units levels off. College tuition is likely to rise about 4%.

Dept. of Labor: Inflation Data

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Business Spending

Last updated: June 24, 2015

By Glenn Somerville

We still see business spending expanding by 4% this year, despite hitting another soft patch in May, when orders for costly long-lasting goods fell 1.8% on the heels of a 1.5% drop in April.

Weak orders for new commercial aircraft accounted for much of the slack in both months, but there are indications that demand has picked up this month. Key producer Boeing has a healthy order backlog, in any event. The best reason for optimism about the months ahead: Orders for core capital goods, a category that includes nondefense items and excludes aircraft, climbed by 0.4% in May after weakening 0.3% in April. The number is seen as a proxy for company spending on equipment and software, so the modest pickup in May is encouraging for the longer term even if it doesn’t point to assembly lines humming until later in the year.

By late fall, we expect corporate purse strings to loosen modestly enough to accommodate more investment. U.S. labor markets are tightening, supporting stronger income growth and spending by consumers. Sales of new cars and light trucks have held up well, inducing carmakers to maintain or expand capacity and to keep modernizing plants. Moreover, the housing sector is showing solid signs of rebounding from a soft, weather-plagued start to 2015. The housing recovery will hike demand for a range of manufactured goods from trucks to tools and industrial machinery.

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

Energy

Last updated: July 24, 2015

By Jim Patterson

Another rough week for oil bulls, as the price of crude continues to slip. West Texas Intermediate (WTI), the U.S. oil benchmark, fell below $50 per barrel for the first time in months, trading near $48 per barrel by late in the week.

Seemingly all the oil-related news has been bearish lately: A pending nuclear deal with Iran that could end the sanctions that have kept much of Iran’s oil off the market. Continuing jitters about Europe’s economy in the wake of the latest Greek debt crisis. And fears that a slowing Chinese economy will weigh on demand for crude. Adding insult to injury, U.S. energy firms are starting to operate more drilling rigs after a long period of cutting back. That raises concerns that future oil supplies could swell and further depress prices.

But don’t lose sight of market fundamentals, which don’t support the bearish case for oil just yet. Total petroleum consumption in the U.S. is up more than 3% from this time last year, as folks take advantage of cheap gasoline to drive more. And oil production in the U.S., which had surged until recently, isn’t growing anymore. In fact, output appears to be down slightly in the last few weeks, according to preliminary Department of Energy data.

We look for a mild rally for oil this summer, taking WTI back to a range of $55 to $60 per barrel by September, before prices start to soften again as fall arrives. Later in autumn, expect crude to trade near $50 per barrel. Gasoline and diesel prices should gradually trend down over that period. The national average price of regular unleaded gasoline, now $2.73 per gallon, will be close to $2.50 in early fall. Diesel, now averaging $2.78 per gallon, figures to slide toward $2.70.

Unlike crude oil, natural gas remains locked in a tight trading range, with the benchmark gas price recently at $2.79 per million British thermal units and barely changed from the beginning of the week. Absent a major heat wave, which would fire up demand for gas from electric power plants, we don’t see gas trading below $2.60 or above $2.90 anytime soon.

Dept. of Energy: Price Statistics

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Housing

Last updated: July 2, 2015

By Rodrigo Sermeño

The housing market seems to have finally found its footing. Amid strong employment gains and higher consumer confidence in the economy, greater demand for housing has led to increased home sales in recent months. We expect home sales to continue to improve in the second half of the year. Specifically, a 6.8% rise in existing sales and a further 23% pickup in new-homes sales over the year.

Note that first-time home buyers and folks with less-than-stellar credit scores are finding it a little easier to get a mortgage. The number of applications for certain loans for first-time home buyers has picked up for the first time in several years. Lower down payments for creditworthy borrowers and a reduction in the mortgage insurance premium for Federal Housing Administration loans indicate somewhat easier terms for some people.

Moreover, the rate at which Americans are forming new households has been consistently rising in recent months — more positive news for builders, as it means more demand for both rental and for-sale units.

Housing starts will finish on a strong note this year, after a rough start because of bad weather in many parts of the country earlier this year. Construction perked up in the spring as builders broke ground on new projects across the nation, and we expect this trend to continue, with housing starts rising 11% between now and year-end.

Builders will have a lot of catching up to do. Inventories of new homes are at low levels because of the recession-caused slowdown in construction. But they still face some headwinds. While obtaining financing for new-home construction is improving, it’s still relatively hard for builders to get a loan for land acquisition and development. So far, the lack of inventory hasn’t resulted in runaway home prices. In fact, home values seem to be rising at a fairly moderate and sustainable pace nationwide.

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: July 17, 2015

By Lisa Elaine Babb

With employers continuing to hire and wages rising, putting more money into consumers’ pockets, we look for retail sales to perk up modestly in the second half of the year.

But the weak first half of the year — including an especially dismal showing in June, which saw overall retail sales fall 0.3% from May — will drag down retail sales growth for the year. We now expect a 4.5% pace for the year, down two ticks from last year.

The June swoon was fairly broad-based, largely because many consumers were keeping their purse strings tight, at least when it came to retail goods. But cheap imports also played a role. Lower prices for imported foods, for example, helped depress grocery store sales 0.2% from May. Another factor: Healthy sales around Memorial Day, which pumped up May but left shoppers with less in their wallets for June. On the other side of the ledger, electronics and appliance stores saw the biggest gains in June — 1%.

Online and catalog merchants will see the strongest sales this year, registering a gain of 10%-plus, while sales at restaurants and bars will be up 8%. Sales of cars and trucks will remain strong through the rest of the year.

Dept. of Commerce: Retail Data

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Trade

Last updated: July 8, 2015

By Glenn Somerville

Look for the U.S. trade deficit with the rest of the world to widen significantly this year. Exports will continue to soften as the dollar’s relative strength against key currencies, such as the euro, the yen and the Canadian dollar, drives up prices abroad for American-made products.

Meanwhile, the bulked-up dollar is making imports cheaper as a faster-growing U.S. economy draws in more goods in the second half of the year. We look for a full-year deficit of about $555 billion, 10% more than in 2014.

The shortfall on trade in May climbed 3% to $41.9 billion, as exports dropped by $1.5 billion or 0.8% to $188.6 billion and imports fell modestly by $300 million or 0.1% to $230.5 billion. We expect exports to decline further in coming months, partly because of weakening growth in China and sluggishness in Europe, while imports strengthen as a steadily improving U.S. job market and modest income gains put more money in consumers’ pockets.

Overseas sales of high-value capital goods declined in May, a possible sign that some buyers of U.S. machinery and other hard goods are looking for less expensive alternatives. Services exports were up from April, though, despite the strong dollar.

Though the trade balance has been a drag on U.S. economic output in four of the past five quarters and was a major contributor to the first-quarter contraction in GDP, its negative impact on growth will diminish as the year wears on.

One continuing bright spot: Oil imports will keep falling as domestic production continues to increase. The trade deficit for petroleum products in May was $5.78 billion, the lowest since February 2002, even though the price of oil topped $50 a barrel for the first time since January. By the end of this decade, rising production from U.S. shale oil fields will make the United States not only fully independent in energy trade but a net exporter.

Dept. of Commerce: Trade Data

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