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Tool | May 2015

Kiplinger's Economic Outlooks

Over 4% in second-half '15; 2.6% for the year
Falling to 5.1% by end '15
Interest rates
By end '15, 10-year T-notes at 2.4%; mortgages, 4.1%
1% for '15, up from 0.8% in '14
Business spending
Increasing by 4% in '15, vs. 5% in '14
Crude oil trading from $60 to $65/bbl. by August
New-home sales rising 20% in '15
Retail sales
Up 3.9% this year, excluding autos and gasoline
Trade deficit
Widening by 10% in '15
Practical Economics columns
Make sense of the latest data and trends.


Last updated: May 29, 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 0.7% contraction.

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. Note that a slow start last year was followed by a strong rebound. We expect a similar pattern this year, with growth of more than 4% in the second half of the year.

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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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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Last updated: May 22, 2015

By David Payne

Any pickup in gasoline prices in the remainder of this year won’t be enough to push up the inflation rate much. Consumer prices will pick up only about 1% over the 12 months of 2015, compared with an exceptionally low 0.8% increase last year. The strong dollar will limit price increases of commodities, both because U.S. manufacturers are paying less for raw materials and because they are competing against lower-valued imports. (A rise in the dollar’s value means foreign producers can lower the price of items they sell in the U.S. market and still make the same profit in their own currencies.) Finally, wage increases will continue to be moderate. We expect wages to rise an average of 2.5% this year, compared with 2.1% in 2014.

The first signs of price pressure will be seen in the prices of services. Medical services costs will go up about 3.5% this year. The cost of shelter will continue to rise at about a 3% rate because rents are climbing, a trend that 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%.

The core rate of inflation, which excludes food and energy prices, will rise by about 1.9% in 2015,December to December, also up slightly from 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. Though total price inflation will stay below the 2% target into 2016, the Federal Reserve may use any pickup in core inflation as its justification for an interest rate hike this autumn.

Dept. of Labor: Inflation Data

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Business Spending

Last updated: May 29, 2015

By Glenn Somerville

Despite improvement in April, we look for business spending to expand by a lackluster 4% this year, compared with growth of 5% in 2014.

Investment weakness stems from multiple sources, including a still-strong dollar, which is hampering exports while making imports cheaper. Softer exports and growing imports put a damper on the production of goods in the U.S. The trade imbalance will persist at least until fall. Businesses also remain cautious about slow growth in both Europe and China. And though the slowdown in spending by energy firms is likely over, the impact of billions of dollars’ worth of canceled investment projects will continue to ripple throughout the U.S. economy.

But there are also some positive factors that will coax firms into loosening their purse strings. Oil prices are showing renewed vigor and are expected to reach $60-$65 a barrel by August, providing incentive for energy companies to put more drilling rigs back into service and take some investment projects out of mothballs.

Strong sales of new cars and light pickups will induce car companies to maintain or expand capacity and modernize equipment. Similarly, major producers of commercial aircraft have order backlogs large enough to keep their factories busy for years to come. Further, the housing sector is also rebounding after a soft, weather-plagued start to the year. That recovery is helping to hike demand for a wide range of long-lasting durable goods, including trucks, industrial machinery and tools.

New orders for machinery in April surged 3.1%, the best monthly gain in eight months. There was also more demand for primary metals and for fabricated metal products. So-called core capital goods orders, a category that includes nondefense products and excludes aircraft, gained 1% after a 1.5% rise in March. The April numbers don’t point toward assembly lines humming this summer. But it was at least mildly reassuring to have back-to-back monthly gains in both new orders for capital goods and shipments out the factory door of completed products.

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


Last updated: May 29, 2015

By Jim Patterson

Oil prices continue to tread water. At $59 per barrel, West Texas Intermediate (WTI), the U.S. crude benchmark, is little changed from a week ago. Oil demand remains strong, according to the latest weekly government data, which should be bullish for crude. But U.S. production took a surprising leap higher this week, which suggests markets will remain well supplied. Moreover, the stronger dollar is also keeping oil — which is priced in dollars — from rising much.

We continue to look for oil to gradually trend higher, hitting a trading range of $60 to $65 per barrel by August. Brief spikes or dips are inevitable along the way, but unless production in the Middle East is threatened by a new crisis, major price moves are unlikely.

Prices at the pump should sneak a tad higher. At $2.74 per gallon, the national average price of regular unleaded is unchanged from last Friday. Odds are, continued strong demand for gasoline will nudge the average price toward $2.80 by the beginning of summer. Diesel is also holding steady, but figures to rise slightly from its current average of $2.89 per gallon.

Natural gas prices have cooled off again, as we expected they would. At $2.67 per million British thermal units (MMBtu), the benchmark gas price is off sharply from a few weeks ago, and at the low end of our forecast trading range of $2.60 to $2.90 per MMBtu. Barring a major heat wave that spikes demand for electricity and revs up gas-fired power plants, gas is unlikely to deviate much from its current level.

Dept. of Energy: Price Statistics

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Last updated: May 29, 2015

By Rodrigo Sermeño

The housing market seems to be improving, but various indicators continue to provide mixed signals. Real estate agents and builders both report more interest from buyers, boosting their expectations of solid spring home buying numbers. Demand has clearly increased as steady job growth, low mortgage rates and rising rental costs have pushed potential buyers into the market. The number of people signing contracts to buy a previously built home has risen for four consecutive months.

We expect existing-home sales to strengthen in coming months as pending home sales are finalized. Existing-home sales fell 3.3% in April, but remain 2% above last year’s pace. Inventory of homes on the market remains low, despite a slight increase in recent months. As a result, buyers are finding strong competition for properties. Homes have been selling quickly, staying on the market for 39 days on average.

New-home sales will grow by 20% in 2015. They’re averaging 515,000 a month so far this year — a healthy pace not seen since 2008 — and are up by 26% from March 2014.

Housing starts perked up significantly in April. They increased 20% from March to a seasonally adjusted annual rate of 1.1 million. This pace, while indicating positive momentum, is still well below what is needed to keep up with demand and stave off strong price appreciation.

But lending isn’t keeping pace. Loans for acquisition, development and construction have increased during the last two years, but remain far below past levels. Tight credit is a factor in holding back a stronger rebound in residential construction. Builders, though, are starting to see some improvement in construction-lending conditions, partly due to a wider array of nonbank financial institutions making loans.

Prices will continue their steady, upward trend. They jumped 4.1% in March from a year ago, and look to pick up pace a bit because of the combination of tight inventories and subdued new residential construction.

Dept. of Commerce: New-Home Sales
National Assn. of Realtors: Existing-Home Sales
Dept. of Commerce: Housing Starts

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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 volatile autos and gasoline — at 3.9% for the year, the same as 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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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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