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Tool | May 2015

Kiplinger's Economic Outlooks

GDP
2.6% likely in '15, from 2.4% in '14
Unemployment
Falling to 5.1% by end '15
Interest rates
By end '15, 10-year T-notes at 2.4%; mortgages, 4.1%
Inflation
1% for '15, up from 0.8% in '14
Business spending
Increasing by 4% in '15, down from last year
Energy
Crude oil trading from $60 to $65/bbl. by August
Housing
New-home sales will rise nearly 20% in '15
Retail sales
Up 4% 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: May 8, 2015

By David Payne

Don’t be thrown by the weak first-quarter GDP report. In a replay of last year, harsh winter weather that hindered housing starts and sapped consumer spending is largely to blame for the meager 0.2% growth (and this number is highly likely to end up slightly below zero at the next revision).

Decreased exports because of the rise in the value of the dollar also factor in the sluggish showing, as does a decline in oilfield investment due to the drop in oil prices.

The economy is sure to pick up steam in coming months, improving to 2.6% to 3% for the year as a whole, depending on its strength during the rest of the year. Note that a slow start last year was followed by a strong rebound.

Continuing job gains and growth in consumer incomes will spur purchases of homes, cars and other products and services. Lower gasoline prices are also putting more money into consumers’ pockets, helping to fuel consumer outlays in the months to come.

The housing market is also in for a solid year, propelled by job and income gains plus an increase in household formations and pent-up demand.

And though the Federal Reserve has more or less promised to start raising interest rates this year — most likely in September — we expect the hikes to be modest.

Dept. of Commerce: GDP Data

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Employment

Last updated: May 8, 2015

By David Payne

Job gains exceeded 200,000 in April and should continue at that level for the rest of the year. The addition of just 85,000 jobs in March reflected a slight contraction in first-quarter GDP growth, and there is likely to be a rebound in the second quarter. The number of job openings is also at a high level, a further indication of more hiring to come. The gains will fuel consumer and business confidence and lead to consumer spending and, later on, rising wages.

Eventually, job gains will slow to a more sustainable level as unemployment nears 5%, but that probably won’t happen until next year.

Look for the unemployment rate to finish the year at 5.1%. The rate edged down to 5.4% in April, and the number of long-term unemployed — out of work six months or more — continued to fall. Because the number of short-term unemployed is already at a low level, most of the future decline in the jobless rate will come from further reductions in the long-term ranks. Finally, the number working part-time for economic reasons also continued to fall.

As the unemployment rate continues to decline, employers will feel pressure to hike wages. Wage growth is likely to bump up a bit, to 2.5% by the end of the year, after running at about 2% for most of 2014.

Dept. of Labor: Employment Data

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Interest Rates

Last updated: April 24, 2015

By David Payne

Look for the Federal Reserve to bump up short-term rates by one-quarter of a percentage point in September, before taking a wait-and-see approach to raising them further. Despite a 5.5% unemployment rate, Fed Chair Janet Yellen still sees slack in the labor market, noting there are more dangers associated with raising interest rates too quickly than with not quickly enough. She’ll be sure to evaluate the impact of the September increase before moving on. Odds are, another increase wouldn’t come until the Fed’s meeting in December (skipping over the October meeting) and perhaps not until January.

As credit markets prepare for the Fed to lift short-term rates, yields on longer-term debt will perk up as well: 10-year Treasuries will spike a few ticks above where they are now…1.9%...before settling around 2.4% at year-end, while 30-year fixed-rate mortgages will wind up at 4.1%, versus 3.7% now. The end-of-the-year rates will likely persist well into 2016.

There are three reasons why long-term interest rates will stay relatively low for a while, regardless of what happens to short rates. First, consumer prices in the U.S. are unlikely to pick up much anytime soon. Second, European interest rates will probably stay extremely low for a long time. The Fed is not going to want to widen the gap between U.S. and European interest rates too much and risk taking blame for an even bigger rise in the value of the dollar, which is already robust versus many other currencies, hurting U.S. exporters.

Long-term rates in Europe now at around zero will stay low (possibly even dipping into negative territory, joining short-term rates) for as long as the European Central Bank buys up a substantial portion of the European bond market at 60 billion euros a month, creating a shortage in the availability of bonds to investors. The ECB intends to continue to do so until September 2016.

Finally, China’s central bank seems to be committing itself to further monetary easing, as Japan’s central bank did earlier. How much easing both these banks commit to will help determine the global liquidity environment for some time to come.

Federal Open Market Committee

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Inflation

Last updated: April 24, 2015

By David Payne

Inflation will stay low this year, despite a pickup in gasoline prices. Consumer prices will pick up 1% over the 12 months of 2015, compared with an exceptionally low 0.8% increase last year. Inflation will stay well below the Federal Reserve’s 2% target rate as a strong dollar causes prices of imported commodities to decline. Also, manufacturers will be able to keep a lid on prices of goods produced in the U.S. because they’ll be paying less for raw materials. Finally, wage increases will continue to be moderate.

The core rate of inflation, which excludes food and energy prices, will rise by about 1.7% in 2015, December to December — nearly the same as the 1.6% rate in 2014. The core rate is typically seen as a more accurate gauge of underlying inflation because of the volatility of food and energy costs.

Some outliers: Medical costs will go up about 4% this year. The cost of shelter will continue to rise at about 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. And college tuition is likely to rise about 4%.

Eventually, the stronger economy will boost general inflation, but probably not until 2016 or later. That scenario will give the Federal Reserve more flexibility in managing interest rates without the markets beginning to worry that it isn’t raising interest rates fast enough.

Dept. of Labor: Inflation Data

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Business Spending

Last updated: April 24, 2015

By Glenn Somerville

Less investment by energy exploration and development companies this year will weigh on overall capital expenditures. Look for business spending to grow about 4% this year, below earlier expectations and a tick below last year’s 5% pace. Moreover, the pickup in spending won’t come until well into the second half of the year.

Some big energy services companies such as Halliburton and Schlumberger are continuing to pare equipment budgets in the wake of low oil prices and may keep doing so for at least a few more months.

At the same time, the strong U.S. dollar is softening demand abroad for U.S.-made goods, causing some manufacturers to hold back on plans to expand and upgrade equipment. Also caution flags for U.S. businesses: China’s moderating pace of growth and the continuing uncertainty of European growth, especially while questions remain about heavily indebted Greece’s position in the euro zone.

But more robust consumer spending on goods and services in coming months will encourage companies to invest more to meet demand.

A partial recovery in oil prices by late summer, to around $60 to $65 a barrel, should induce oil and gas producers, as well, to resume a modest pace of investing.

March orders for a wide variety of goods typically associated with higher capital spending — primary metals, fabricated metals, machinery, communications gear, electrical equipment — all weakened from February levels.

New orders for all types of nonmilitary capital goods, excluding aircraft, fell by 0.5% during March — a seventh straight monthly decline that underlines a significant weakening trend for new investment. Shipments of these so-called core goods also dipped in March, an indication that factories were less busy than in February.

On the positive side for manufacturers, sales of new cars and light trucks remain strong, prompting automakers and parts suppliers to maintain or expand plant capacity and upgrade equipment. And aircraft makers have order backlogs stretching on for years.

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

Energy

Last updated: May 15, 2015

By Jim Patterson

Oil prices are finally taking a breather, after a spring rally that has pushed up crude by more than 40 percent. At $59 per barrel, West Texas Intermediate (WTI), the U.S. crude benchmark, is about where it was a week ago, though it briefly rallied above $61 earlier this week.

We see some signs that the spring price rally is losing steam. Domestic production has leveled off because of the big decline in drilling activity, but at more than 9.3 million barrels per day, output is still strong. The recent price run-up has made it easier for energy firms to keep drilling and pumping crude, making a big drop in output unlikely. So look for prices to largely hold steady, with WTI trending slightly higher as summer arrives. We expect a price of $60 to $65 per barrel by August.

Prices at the gas pump should inch up more in coming weeks. At $2.69 per gallon, the national average price of regular unleaded is up 3 cents from a week ago, and figures to approach $2.75 per gallon fairly soon. But we don’t see gasoline rising much more than that. Diesel will also gain a bit. The national average price, now at $2.87 per gallon, could come closer to $3 sometime this summer.

Natural gas prices are up. But likely not for long. At about $3 per million British thermal units (MMBtu), the benchmark gas price is up again from a week ago and slightly above our expected trading range of $2.60 to $2.90 per MMBtu. A mix of cool and warm weather across the country has bumped up demand for natural gas, both for heating and for running power plants. But unless the weather turns hot and stays hot for a protracted period of time, demand should cool off, allowing supplies to build up. That, in turn, will weigh on prices a bit.

Dept. of Energy: Price Statistics

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Housing

Last updated: May 1, 2015

By Rodrigo Sermeño

In a positive start to the spring home buying season, existing-home sales jumped in March to their highest annual rate in 18 months. Sales have increased year-over-year for six consecutive months, reflecting buyer confidence and providing some much-needed release to built-up demand accumulated in recent years.

New-home sales suffered a notable slump, but they remain on track to a solid year. As we expected, new-home sales started slowly in March because of severe weather in many parts of the country. The spring selling season opened with sharp declines in the number of homes built in the Northeast and South. The West registered a slight loss and the Midwest, a modest gain. Overall, new-home sales fell to a seasonally adjusted annual rate of 481,000 in March, from 543,000 in February. But the encouraging sales figures from previous months indicate more underlying strength than the most recent numbers show.

Housing starts are still sluggish, reflecting problems in the construction sector. Though big builders have ramped up construction in recent months, small, cash-strapped builders, which build the majority of new homes in the U.S., are still having a hard time getting construction loans. Many builders also face difficulties in securing loans for acquiring and developing land on which to build, which spells a shortage of buildable lots.

With demand for homes on a steady upward trend amid low inventory, home prices are also headed higher. The number of Americans signing contracts to buy a previously owned home rose for a third straight month in March. Meanwhile, inventories of unsold existing homes remain tight, driving up prices — a trend that will continue in the months ahead.

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: May 15, 2015

By Lisa Elaine Babb

Look for retail sales to rebound from a poor showing in April that was brought about, at least in part, by an early Easter, which fell on April 5 this year. The slow pace of retail spending growth mirrors similar April slowdowns in years when the holiday falls near the start of the month, despite seasonal adjustments by the Census Bureau. Retail sales had posted better results in March as many people did their Easter shopping ahead of the holiday, and as winter weather receded.

April sales were unchanged from a 1.1% gain in March. Vendors of sports equipment, books and music saw sales rise 0.8% from March — an increase of 6.4% compared with April 2014. Health care stores and retailers selling online or through catalogs registered a 0.8% increase. For car dealers, a 0.4% increase in sales in April, on the heels of a 3% bump up the previous month.

We see retail sales growth — excluding gasoline — approaching 4% for the year, versus 4.7% in 2014. With more and more employers hanging out “help wanted” signs and incomes on the rise, expect consumers to loosen their purse strings in coming months. Rising disposable incomes will prompt people to spend more on going out on the town, which will help boost sales at restaurants and bars 7% from last year. Online sellers and catalog shippers will see sales up more than 10%, while building materials sales will climb a solid 6%, fueled by construction of new homes and remodeling projects.

Dept. of Commerce: Retail Data

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Trade

Last updated: May 8, 2015

By Glenn Somerville

The U.S. trade deficit is on course to widen significantly this year, driven partly by a more muscular U.S. dollar. The beefier buck is helping to lower the cost of imports, benefiting foreign suppliers as they push harder to beef up sales in the United States. Meanwhile, the dollar’s rise in value versus many other currencies makes U.S. exports more expensive in foreign markets.

Pricier U.S. goods abroad will spur foreign customers to seek alternative sources for at least some goods, such as machinery, that they have been importing from the U.S. We look for the full-year 2015 deficit to widen by about 10% from last year’s $504.7-billion gap.

March’s deficit was a shocking $51.4 billion, a 43% jump from February’s $35.9 billion and the highest shortfall for any month since October 2008. Some of the monthly swing can be attributed to the resumption in late February of normal operations at West Coast ports after a months-long labor dispute. Work slowdowns and lockouts over a nine-month period had caused a massive backup of goods on the docks — a logjam that’s still being cleared.

Several categories of imports touched record highs in March as merchandise began flowing more normally once again: consumer goods, food and beverages, livestock feed, and capital goods such as industrial machines, computers, and automobiles and parts.

The surge in imports during March will almost certainly pull first-quarter GDP into negative territory from the government’s earlier estimate of slim 0.2% growth, which it calculated without having March trade data in hand. (The government’s initial first-quarter GDP forecast estimated trade figures.)

Nonetheless, economic growth will rebound during the remainder of 2015 to 2.6% or a bit higher for the full year. That’s a better performance than in much of the rest of the world and certainly strong enough to keep drawing in a rising tide of imports from Europe, China and elsewhere. The expanding U.S. economy, which is generating jobs and boosting wages, will have U.S. consumers both willing and able to snap up the bargain imports.

Also on the positive side, America’s steady march toward energy independence is paying off in reduced outlays for imported petroleum from the Middle East. The March deficit for petroleum imports fell to $7.67 billion, the lowest since mid-2002. The cost per barrel of imported petroleum in March was less than half what it was a year earlier — $46.47 versus $93.91. By the end of the decade, the United States should be not only fully independent in energy trade but also a net exporter, thanks to the boom in domestic shale oil production.

Dept. of Commerce: Trade Data

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