Tool | November 2013
Kiplinger's Economic Outlooks
Last updated: November 8, 2013
By David Payne
The sequester and government shutdown contributed to slower GDP growth this year, about 1.7%. But the picture should brighten in 2014, starting in the first quarter. The pickup in growth in the third quarter of 2013, to 2.8%, was deceptive, as businesses added strongly to inventories. Look for fourth-quarter growth to slow to 1.6%, in part because of the shutdown in October.
For all of 2014, we expect average growth of about 2.6%, as business and consumer confidence strengthens and Europe begins to emerge from its 18-month recession, brightening overseas sales prospects. Still, the 2014 economy, like that of 2013, will likely be well below the economy’s long-run potential, four to five years into a recovery.
Congress remains a potential fly in the ointment. Funding to keep the U.S. government running has been authorized only through January 15, while the debt ceiling has been lifted through February 7. Another government shutdown is not likely, but once again congressional action to raise the debt ceiling and to fund government operations is likely to go down to the wire. Thus, continued uncertainty about government spending plans is likely to put a damper on investment and hiring, at least by businesses that contract with the government.
The Federal Reserve will weigh in next year as well; it is not likely to move before the end of this year. It’s approaching a phase-out of its $85-billion-a-month bond buying program. In anticipation, long-term interest rates have already risen this year by about a percentage point, putting a damper on mortgage applications.
Recovery from the punishing 2007-2009 recession remains the slowest since World War II. By mid-2014, quarterly growth should reach an annualized pace of 3%, making the economy more durable in the face of challenges that include policy uncertainty at home as well as soft growth among major trade partners. Then, the economy should be able to reliably generate 200,000 or more jobs a month.
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Last updated: November 8, 2013
By David Payne
October’s job report is a welcome surprise; it hints at better growth in 2014. The October gain of 204,000 jobs and upward revisions to August and September provide encouragement that job growth may be coming out of its midyear funk. October also provided a psychological milestone, since as a rule of thumb, continued job gains of 200,000 a month would signal an economy that has achieved robust health and is generating the jobs needed to support better consumption growth. Job gains were strongest in retail and hospitality, but were widespread across most sectors with the exception of government.
The unemployment rate edged up to 7.3% in October, as many government workers on temporary layoff were counted as unemployed. However, this may still understate unemployment, as many unemployed have also left the labor force. If this weren’t the case, the decline in the unemployment rate from 7.6% in June to 7.3% in October would likely have been just half of what it was. The number dropping out brought the labor force participation rate down from 63.5% to 62.8% during the same period.
As job creation starts to pick up, the unemployment rate is likely to stabilize -- bouncing around in the range of 6.9% to 7.2% as people are encouraged to come back into the labor market, looking for a job. It won’t begin to make real downward strides again until job growth becomes more vigorous, mid-2014 at earliest.
Jobs created so far this year are overwhelmingly in service industries, including retailing, restaurants and health care, where wages are lower and more part-time jobs are offered. Goods producers are keeping a rein on payrolls until economic growth improves. And governments are restrained in their hiring because of budget restraints stemming from the federal sequester and its cascading impact on state and local spending.
Earnings ticked higher. Average hourly earnings increased four cents to $24.10, up 2.2% over the past twelve months. This is better than the 1.2% rate of inflation, so real earnings have risen, which should help consumer spending over the near term.
The bottom line is that progress in rebuilding labor markets remains grindingly slow. There are still about 2 million fewer jobs now than when the recession began in 2007 and there’s no hiring boom in sight. Only gradual improvement is likely, as GDP growth picks up next year.
Last updated: October 25, 2013
By Glenn Somerville
Short-term interest rates will remain low through 2014, largely because core inflation remains below 2% and an anticipated pickup in economic growth late this year and into 2014 will be modest. It’s unclear yet how much economic damage was wreaked by a 16-day government shutdown and political battle over hiking the debt limit, but consumer and business confidence did take a hit, so the economy will enter 2014 with less vigor than it otherwise would have had.
Thus, it’s likely that the Federal Reserve won’t begin tapering off its bond buying until 2014, prolonging the uncertainty about what the pullback in economic stimulus will do to interest rates. Regardless of the timing of the scale-back in quantitative easing, the Fed has been careful to distinguish a decision by the Federal Open Market Committee to hike the federal funds rate from a move to reduce Fed bond buying. The federal funds rate has been at a historic low, between zero and 0.25%, since December 2008 and policymakers won’t raise it until early 2015. Even then, the increase will come only if the economy has enough momentum to bring unemployment well below current levels.
A backup in long-term rates, determined in the financial markets, bears watching. Slow but steady strengthening of U.S. housing markets, as well as the global economy generally, will keep upward pressure on long rates. Indeed, they have already shifted higher as market participants prepare for the change. We look for the 10-year Treasury rate to start rising gradually after the end of the year, and finish 2014 at 3.3% -- still low by historical standards. Rates for 30-year mortgages -- now at around 4.25% -- will climb to around 5.5% next year. Though still low, historically speaking, that’s well ahead of the 3% to 3.25% rates that could be found at the beginning of 2013. Big hikes in long-term rates aren’t in the cards -- the economy isn’t strong enough to generate them or to tolerate them. But policymakers will need to beware of spooking markets into actions that send rates up on speculation.
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Last updated: December 3, 2013
By David Payne
There is still little sign that price pressures are building, and inflation is likely to remain below 2% in 2014. Although economic growth will pick up next year, the unemployment rate is likely to remain stubbornly high, and wage increases, modest. That will restrain incomes and keep U.S. consumers cautious , moderating domestic demand. Slow-to-moderate global growth will continue to make it difficult for companies to push through big price hikes.
Look for the Consumer Price Index in 2014 to post an increase of about 1.8%, measuring from December 2013 to December 2014, up from just a 1.4% hike from December 2012 to December 2013. Chalk up the moderate 2013 inflation figure to a drop in energy prices this year plus smaller increases in food prices than in the previous year. While energy prices may continue to decline in 2014, the size of the drop is likely to be smaller, and food prices may return to a more normal rate of growth. Producer prices, also referred to as wholesale prices, are posting modest monthly gains and aren’t likely to create a surge in prices at the retail level.
While U.S. headline inflation rose at only a 1% pace during the 12 months through October, as energy prices dropped and food prices increased modestly, core inflation, which strips out food and energy, was up 1.7%. That’s closer to the Federal Reserve target of 2%-2.5% annual inflation -- the rate policymakers see as necessary to sustain hiring and investment. What’s more, the central bank tracks a slightly different price gauge that typically runs a quarter-point to a half-point lower than core CPI.
Overall, consumer prices ticked down 0.1% in October, following a 0.2% increase in September. Food costs inched upward, while energy prices dropped. Core prices in October also rose just 0.1% for the third month in a row. Prices of used motor vehicles rose for the first time in six months.
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Last updated: December 3, 2013
By Glenn Somerville
Whipsawed by uncertainty about the fiscal outlook and the risk of renewed political hostilities in Washington, corporate chiefs will boost capital spending in 2014 only modestly. Further clouding the outlook for businesses weighing new spending: 2014 is when the Federal Reserve will begin tapering off its massive bond buying program, and it’s unclear how that will affect borrowing rates.
The latest government report on durable goods orders, for October, underlines the caution businesses feel in the face of questions about Washington’s direction. Overall orders were down after a substantial September gain -- in both cases influenced by aircraft orders -- but the underlying message, once defense and transportation business is excluded, is one of softness in both months. Shipments of nondefense capital goods dropped for a second consecutive month in October by 0.2%. The shipments number is significant because it is used to calculate gross domestic product, and business spending was not contributing to growth. Some product categories scored gains in orders, including new cars, electrical equipment and appliances.
Businesses will want to be ready for an anticipated pickup in global growth. They will want some expanded capacity on hand or ready for quick completion. Growth is likely to be only in the 4.5%-5% neighborhood, however, following a roughly 4% increase in 2013. The wild card will be whether politicians once again start wrangling about the fiscal outlook and the debt limit. Renewal of previous hostilities would keep investment at the low end of the forecast. A decision to stop the battling would offer a much more favorable backdrop for hiring and stronger investment.
On a positive note, Europe is now out of recession, albeit just and growing only slowly. It might be a better market in 2014 for U.S.-made manufactured goods. China, too, is talking about moving to increased consumption-led growth, although it will take time to implement policies for spurring consumption. Substantial optimism about 2014 growth and export prospects is speculative. The evidence of more-aggressive investment and spending by U.S. companies to prepare for more growth is spotty at best.
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Last updated: November 22, 2013
By Jim Patterson
As expected, gasoline prices have found their footing. For now, at least. Healthy demand and stable oil prices nudged the average price of regular unleaded gasoline up about 3.5 cents per gallon this week, to $3.24. Odds are, prices will hover near that level from now through the Thanksgiving weekend, as millions of folks take to the highways to visit family and friends. Diesel prices have been even calmer, sticking at $3.82 per gallon: unchanged from a week ago. Figure on them staying close to that level over the next week or two.
Looking ahead, we see further declines for crude oil and fuel prices because of a combination of lower seasonal demand and the continued rise in domestic oil production. West Texas Intermediate -- the U.S. benchmark for crude -- will slip a bit from today’s level near $95 per barrel, with prices late in the year trending closer to $90 per barrel. That gradual decline figures to bring retail gas prices down a bit more, to between $3.10 and $3.15 per gallon by year-end -- a gift for consumers during the holiday shopping season. For diesel, expect the national average to slip to $3.80 per gallon.
In contrast, natural gas prices are starting to heat up. At $3.76 per million British thermal units (MMBtu), the spot price for natural gas is up more than a dime from a week ago, and should continue heading higher. Sharply colder weather in much of the U.S. is sure to put a dent in stocks of gas in underground storage. If the cold seasonal pattern continues into December, gas prices will remain under upward pressure. We continue to expect wintertime gas prices to range from $4 to $4.50 per MMBtu for much of the season.
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Last updated: November 4, 2013
By Gillian B. White
Gains in the housing market will hold up through the end of 2013 and continue in 2014, but at a more moderate, sustainable rate. In both years, we expect the housing sector to contribute more than half a percentage point to GDP growth. Indeed, in 2014 all major indicators of growth -- sales of new homes, sales of existing homes and building starts -- should rise, for the third year since 2005. Growth will continue to be unevenly distributed across states, however.
For 2014, we expect about a 4% increase in existing-home sales, to 5.2 million, up from nearly 5 million in 2013 -- a healthy 7.5% increase from 2012. At the same time, new-home sales are likely to climb by about 16% to 580,000 next year, following a whopping 36% increase in 2013 and a 20% hike racked up in 2012.
Look for construction of about 1.1 million new homes to begin in 2014, as builder confidence grows and inventory remains tight. That’s an increase from 2013 building starts, which will total at least 950,000. Because of the government shutdown in October, figures for building starts and permits in September 2013 are not yet available. In August, a modest increase in the pace of monthly starts, to an annual rate of 891,000, accompanied a modest decline in the pace of housing permits issued. They dipped 3.8% from July to an annualized pace of 918,000. Overall, the number of permits is likely to continue to exceed sales of new homes, eventually boosting inventory.
Although the pace of existing-home sales declined 1.9% in September, to an annualized rate of 5.29 million, and rising mortgage rates and political and economic uncertainty in October eroded builder confidence somewhat, the tight inventory continues to encourage builders. Housing inventory remained unchanged in September at 2.21 million homes for sale, or five months of supply at current purchasing levels. About six months’ worth of inventory is usually considered a healthy mix of supply and demand.
In some areas, the shortage of inventory is, in fact, significant, leading to multiple bids from buyers and high price spikes. That should cool, however, as mortgage rates continue to creep higher in 2014. Quick sales in high-demand regions, such as California and Arizona, will continue throughout next year, while other areas, such as New York and Florida, continue to face a glut.
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Last updated: November 5, 2013
By Gillian B. White
Look for retail sales to accelerate steadily in 2014, with a gain in the 5.2% to 5.7% range, after a more modest increase of 4.5% this year. A stronger economy, particularly continuing robust gains in auto sales, will help. We expect vehicle sales to pick up by almost 5%, to 16.3 million units, up from about 15.6 million at the close of 2013. That will be the best showing for the industry since 2007, when 16.5 million vehicles were sold. By next year, consumers will have adapted to the increase in the payroll tax and be benefiting from a bit more than a 3% increase in personal income.
Ongoing job creation in the fourth quarter -- albeit at a modest pace -- and the impending holiday season should encourage more spending in the final quarter of the year than was seen during the previous quarter. Significant growth in the retail sector won’t take root until the new year, however. At the close of the first quarter of 2014, sales will top year-earlier figures by around 5.5%. That’s nearly double the pace seen at the close of the first quarter of 2013, when sales topped year-earlier growth by only 2.8%.
In September, overall retail sales dipped 0.1%, the first decline since March. But the decline was largely the result of what was more than likely a temporary drop in auto sales. Autos account for about one-fifth of monthly business They fell more than 2% in September, at least in part because of a quirk in the industry’s calendar. It counts sales for the first two days of September, including the Labor Day holiday, in August rather than in September. August auto sales were positive, rising 0.7% from July tallies.
Core sales, which exclude autos, posted growth of 0.4%, the second-largest monthly gain thus far in 2013. Grocery stores, electronics stores and food service retailers led the way, all climbing 0.7% or more from their August tallies. Restaurant and bar sales grew 0.9% in September, after being flat for most of the year, possibly indicating less belt-tightening among consumers, given that eating out is usually considered to be discretionary spending. And sales at health and personal care stores added 0.4% to their continuing 2013 growth.
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Last updated: November 18, 2013
By Glenn Somerville
Less dependence on imported oil and a gradually improving global economy are helping bring the U.S. deficit in trade with the rest of the world down this year and should continue to do so in 2014. In the first three quarters of this year, the trade deficit has tumbled nearly 12% from the comparable 2012 period. That heady pace of improvement won’t last through the full year, but a 5% narrowing from 2012’s $535-billion deficit is likely for all of 2013, with another reduction in the 5% range to follow in 2014.
September’s trade deficit grew to $41.8 billion from $38.7 billion in August but was skewed by some special factors -- including higher imports in some volatile categories such as aircraft -- unlikely to be repeated soon. Imports of other products, including new cars, capital goods and industrial supplies, also picked up in September, a sign of resilience in both consumer markets and the manufacturing sector.
Exports fell modestly in September from year-earlier monthly levels, but in the first nine months were up by 2% over the comparable year-earlier period. That’s a less-than-stellar gain, and a heftier pickup likely will have to wait until 2014. Europe -- not long out of recession -- and a slower-growing China should prove stronger buyers for U.S.-made goods next year, but at the moment they are still trying to set their own economies on a sounder long-term footing.
On the positive side, domestic production of oil and gas still is rising, making the United States rapidly less dependent on imported oil while shrinking the trade deficit. Increasing output of oil from shale will make the United States the world’s top oil producer by 2015, the International Energy Agency recently predicted. That implies longer-run potential for a continued narrowing in the deficit and should turn trade into a stronger contributor to GDP growth in 2014.