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Tool | September 2014

Kiplinger's Economic Outlooks

GDP
3.5% in Q3; 3.0% in Q4 and '15
Unemployment
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
Inflation
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
Energy
Oil trading from $90 to $95/bbl. through December
Housing
Pace of sales, starts accelerating for rest of '14 and into '15
Retail sales
Slowing to 4% growth in '15, after gaining 5% this year
Trade deficit
Unchanged from '13; U.S. growth pulling in more imports
Practical Economics columns
Make sense of the latest data and trends

GDP

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

Employment

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

More from Kiplinger: Next Rise in Interest Rates Will Come in 2015

Inflation

Last updated: September 24, 2014

By David Payne

Headline inflation will continue to slide in the second half of 2014, dropping below a 1% annualized rate from 2.6% in the first half. Declining energy prices in August and September contributed most to the falloff already seen and will likely continue to dampen inflation for a while. Pressure on food costs, which surged in the first half, will ease somewhat. The strong rise in meat prices should abate before the end of the year, but prices will remain elevated for some time to come.

Inflation in 2015 will be roughly constant at about 2%. Price pressures in 2015 will be about the same as 2014, despite the tendency of food and energy prices to fluctuate. Eventually, the stronger economy will boost general inflation, but that’s not likely until 2016 or later. This should give the Federal Reserve more flexibility to manage interest rates without the markets beginning to worry that it is not raising interest rates fast enough.

We expect 2014 inflation to wind up at about 1.8%, measuring December 2014 over December 2013. That’s up from a 1.5% rise in 2013, reflecting higher average prices this year for food and shelter. Shelter costs, for example, are running at 3% more this year than last. This is because rents, which have picked up, are used to calculate Consumer Price Index shelter costs.

Prices that exclude food and energy, often called the core rate of inflation, will likewise rise between 1.5% and 2% in 2015 -- about the same as this year. Many analysts look at the core rate to tell them how the breadth of prices is moving when the up-and-down pattern of food and energy price movements is removed.

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

Energy

Last updated: September 26, 2014

By Jim Patterson

Another slight gain for natural gas, as the autumn heating season draws nearer for much of the country. At $3.94 per million British thermal units (MMBtu), the benchmark gas price is up almost a dime from a week ago, and is nearly back to our expected trading range of $4 to $4.50 this fall. Supplies are still mounting, but stockpiles won’t return to their seasonal average level in time for cold weather. So look for prices to trend higher as winter wears on, likely in a range of $4.50 to $4.75 per MMBtu early next year.

Gasoline prices aren’t dropping as quickly as earlier this month, but they’re still headed lower. The national average price of regular unleaded slipped a penny this week, to $3.34 per gallon, and we expect that gentle decline to continue. By Columbus Day, look for pump prices to near $3.30 per gallon, and head lower still as winter approaches.

Diesel is also slipping, down two cents this week to the $3.75-per-gallon level we’ve been expecting. Prices could drop a bit further, though rising demand for heating oil -- chemically similar to diesel -- could put a floor under prices later this fall.

Crude oil continues to hold steady, with West Texas Intermediate (WTI) trading at $92.70 -- virtually unchanged from a week ago. Barring a major ramp-up of the fighting in Iraq and Syria, we look for WTI to remain in a range of $90 to $95 per barrel for much of this fall. U.S. output is soaring, with daily production nearing 9 million barrels and showing no signs of slowing. Plus, global demand looks tepid, with little sign of picking up soon.

Dept. of Energy: Price Statistics

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Housing

Last updated: September 26, 2014

By David Payne

A surge in new-home sales in August proves the housing recovery is still on track, though maddeningly erratic, as the 1.8% dip from July to August in sales of existing homes demonstrates. By year-end, the pace of both new- and existing-home sales will accelerate, as will housing starts.

There are several reasons for optimism: Pending home sales (contracts signed but not closed) rose a strong 3.3% in July, indicating a likely pickup in sales of existing homes in September. Foot traffic at open houses is up in 57% of local housing markets, the most widespread in over a year. For new homes, buyer traffic has risen for five consecutive months, to its highest level since 2005, and is only a little below what it would be in a normal expansion market. Builder expectations of future sales have also been steadily climbing. Moreover, inventories of homes for sale -- both existing and new -- are still low, and the typical new home sits on the market for only three and a half months. That’s half as long as it did as recently as 2011, and below the 4-5 months that is considered typical for a normal market.

Ironically, the sales dip in August may, in fact, signal an improving market. It resulted from a drop in investor purchases, which hit a five-year low of 12% of existing home sales. Investors typically cut back on purchases when there are fewer bargains to be had. Distressed sales (foreclosures and short sales) fell to 8% of sales in August, the lowest level since the housing boom ended.

Look for the pace of existing-home sales to rise about 5.0% from the August level to about 5.3 million (annualized) at the end of the year. That will put total sales for 2014 at 5.0 million. For 2015, we expect sales to total about 5.6 million, with the monthly pace accelerating over the course of the year to about 5.7 million (annualized) by year-end. New-home sales will likely hit a total of 455,000 this year, with at least a 20% increase in that total in 2015.

Meanwhile, building should accelerate sharply, with the pace of monthly starts soaring 18% by year-end from the depressed August level. Total starts for 2014 will likely number 1.02 million and for 2015, in the neighborhood of 1.29 million, a 26% rise.

Despite the marked improvement, the housing recovery is likely to remain more of a meandering walk than a jog. Tighter lending standards remain a dampening influence. And while latent demand is high, particularly among 25- to 34-year-olds living with their parents and poised to eventually buy housing, the rate at which they will form new households will be slow.

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: September 26, 2014

By Gillian B. White

Look for retail sales to climb a bit more slowly next year…about 4%, compared with an expected 2014 gain of 5%.

Chalk most of the deceleration up to a plateauing of motor vehicle sales as they approach their historical average. Car and light-truck sales will total about 16.3 million units in both 2015 and 2014, up from 15.6 million at the close of 2013. That’s near the average for autos in the years just preceding the recession -- roughly 16.6 million a year. In fact, monthly sales exceeded the prerecession pace during the first half of this year, peaking at an annualized rate of 16.9 million. They slowed, however, to an annualized pace of about 16.4 million in July and are likely to fluctuate in the mid-16-million range for the rest of the year.

Retail sales of other goods -- ranging from cakes to consumer electronics -- will experience a small pickup as the economy gains speed. Improved job growth, climbing consumer confidence and an increase in personal income will all feed consumer spending through 2015. Look for 2014’s second-half core retail sales, which exclude gas station sales, plus motor vehicle and building supply sales, to climb at about a 5% annualized pace, improving on the 4.1% rate of the first half.

Dept. of Commerce: Retail Data

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Trade

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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