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Tool | October 2014

Kiplinger's Economic Outlooks

GDP
3.3% 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 2.6%; 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 $83 to $88/bbl. through fall
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
Up slightly from '13; U.S. growth pulling in more imports
Practical Economics columns
Make sense of the latest data and trends

GDP

Last updated: October 17, 2014

By David Payne

Better growth is here to stay for a while. In the fourth quarter and into 2015, growth should continue at a 3.0% rate. The first report on the third quarter, to be released by the Bureau of Economic Analysis on October 30, should show about 3.3% growth at an annual rate, driven by motor vehicle sales and business equipment. The healthy third-quarter growth, plus an upward revision of second-quarter growth to 4.6% after a dismal first quarter (a -2.1% growth rate), indicates that economic momentum is back on track.

Setting the stage for more sustained growth in coming months: Disposable income, which after wringing out inflation, grew at a strong 4.2% annualized rate from December 2013 through August 2014. Consumer confidence, though bouncing around from month to month, continues to trend upward. Motor vehicle sales in August 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 10 percent at an annual rate since May, indicating strength in business investment spending. Plus, hiring is on the rise and lay-offs are scarce (indicated by a very low rate of initial unemployment claims since May).

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 rate (better than a 3%) to a simply average pace (2.5%). For now, however, we expect that the likely small increase of a quarter- or a half-percentage point in rates won’t have much impact on GDP growth. Also, if growth in Europe slows for any length of time, then U.S. exports would be hurt, but again, the impact on the broader economy would likely be small.

Dept. of Commerce: GDP Data

More from Kiplinger: States with the Fastest Job Growth in 2014

Employment

Last updated: October 7, 2014

By David Payne

Look for monthly job gains to exceed 200,000 a month for the rest of 2014, and on into 2015. The September pickup of 248,000 jobs confirmed that employment growth is back on track, having topped 200,000 in all but two months in 2014. Further gains in retail, health, food service, professional and business services, and in the hiring of temporary help is likely. Moreover, job openings continue to surge, and the number of new hires is the highest it has been since this data was first recorded in 2000.

The unemployment rate will likely bounce around 6% for a while, gradually declining to around 5.6% by the end of the 2015. At the same time, the abnormally large number of long-term unemployed will continue to decline more rapidly than feared, though it is still likely to take years before it reaches a more typical figure.

It’s worth noting that the drop in the unemployment rate to 5.9% in September occurred for both good and bad reasons. On the negative side: More people left the labor force or never joined it in the first place, especially among the less-educated sector of the population. That’s possibly an indication of their discouragement with the quality of jobs available to them. On the positive: Fewer workers were laid off than in previous months. Tempering that, however, is the lack of wage growth in September. The labor market is simply not tightening enough to push wages, and therefore incomes, up.

We expect that situation to continue for many months yet, as more discouraged workers come back into the labor force. If, however, the labor force continues to grow as slowly as it has been — up only 389,000 over the past 12 months — the market will tighten sooner than expected and wages will start to rise. That could choke off the economic expansion. Part of the sluggishness in labor force growth is that it’s taking longer than anticipated for the increase in job openings and the decrease in the jobless rate to encourage folks who have given up looking to jump back into the hunt. But part is also the large numbers of baby boomers who are reaching retirement age.

Dept. of Labor: Employment Data

More from Kiplinger: Wages to Rise: More for Some than Others

Interest Rates

Last updated: October 7, 2014

By David Payne

Ten-year Treasury rates should be around 2.6% by the end of the year, up a smidge from the current 2.4% rate. Rates would likely have pushed a little higher, based on strengthening GDP growth and an expectation of action by the Federal Reserve to raise rates in 2015, were it not for a series of dampening influences. Among them: The slowdown in many of the world’s other major economies — the euro area, Japan and China — which makes the U.S. more attractive to investors, buoying bond prices, depressing rates and strengthening the value of the dollar. Little worry about inflation. U.S. bank purchases of Treasury securities to meet requirements for quality capital reserves. And recent jitters in the stock market, driving investors to bonds as substitutes for stock holdings.

Eventually, stronger upward movement will prevail, but not this year. 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 rates may jump by as much as half a percentage point. This is likely to come in early 2015, some months before the Fed actually acts. Similar nervousness jolted rates higher in mid-2013, when it became clear that the Fed would soon reduce 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 10-year Treasuries running in the neighborhood of 3.3%.

There is a chance that long rates could rise less than expected in 2015. While it’s virtually guaranteed that the Fed will raise short-term rates, long rates may not move in lockstep with short rates if many of these depressive forces remain. Instead, long rates could rise less than the pickup in short rates, flattening the typical upward curve of yields as durations of loans increase.

Rates for 30-year fixed-rate mortgages will follow the 10-year Treasury rate. Now around 4.2%, 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. But the odds are that the new “normal” for rates is now lower than what it was in the past.

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: October 3, 2014

By Glenn Somerville

A long-awaited pickup in business spending on new equipment to boost production is finally taking shape. It’s not a dramatic surge -- a gain of 4.5%-5% this year, followed by a 7% increase in 2015. But that is a significant improvement from the measly 1.5% spending increase posted during 2013. Consumers as well as both domestic and foreign companies are ordering and buying more manufactured items. This increased demand demonstrates their rising confidence that the economy is on track for more vigorous growth, for the balance of this year and next. Business owners and managers are increasingly convinced that spending to expand capacity is justified.

Rising manufacturing activity is one major impetus. Automakers are having a banner sales year, while aerospace industries and their suppliers are benefiting from demand for new aircraft like Boeing’s 777X. Businesses were operating at nearly 79% of capacity in August, about a percentage point below their historical level but well above year-ago levels and high enough to indicate that some industries are nearing their limits. Orders for machinery, electrical equipment and fabricated metals all are heading upward. There is a continuing demand in multiple industries for equipment to increase automation -- robots, for example, which reduce human input and control costs more closely.

Corporate planners must also keep in mind that interest rates can only go up, so delays in buying risk driving up the cost of future purchases. In August, orders for non-defense-related goods other than aircraft gained 0.6%, and shipments of completed core capital goods also increased. That extended a three-month winning trend for orders and for shipments, which are used to calculate equipment spending in the government’s GDP report.

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

Energy

Last updated: October 17, 2014

By Jim Patterson

Don’t look for a quick recovery in the price of oil, which has sold off dramatically in recent weeks on fears of oversupply and sluggish demand. The slide seems to have stopped for the moment, with West Texas Intermediate (WTI) -- the U.S. oil benchmark -- trading near $83 per barrel. We expect WTI to range from $83 to $88 per barrel for much of this fall, though a brief dip as low as $75 per barrel can’t be ruled out.

Gasoline will keep getting cheaper, continuing the plunge that started last month. At $3.14 per gallon, the national average price of regular unleaded is the lowest since February 2011. Because of cheaper oil, the national average could even flirt with $3 per gallon by Thanksgiving -- a welcome break for consumers as the holiday shopping gets going in earnest.

The price of diesel fuel will ease further, as well. The national average, now at $3.65 per gallon, could drop another nickel by the end of November.

Meanwhile, natural gas prices are enduring continued warm weather, with the benchmark wellhead price off a bit this week at $3.77 per million British thermal units (MMBtu). Still, supplies in underground storage remain below average for this time of year, suggesting prices should rebound once colder weather revs up demand. We expect natural gas to return to a trading range of $4 to $4.50 per MMBtu later this autumn, and drift toward $4.75 per MMBtu by late winter.

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

More from Kiplinger: Housing's Revival Losing Some Heat

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: October 7, 2014

By Glenn Somerville

U.S. exports continue to eke out small gains, but demand from overseas trade partners is bound to come under pressure as global growth cools. Economies are slowing in the euro zone, Japan, China and Brazil, and the U.S. won’t be able reduce the gap between imports and exports this year as it did in 2013. And it may not be able to do so in 2015, either. Further complicating the job of boosting sales in foreign markets: The dollar has been on a rising trend for the past three months against other major currencies, making U.S.-produced goods more expensive for foreigners to buy.

Look for the trade deficit this year to wind up at about $500 billion, an increase from last year’s $476-billion shortfall. A combination of forces is reversing the narrowing trend of 2013, when the trade gap shrank by 11%. The U.S. economy’s growth is outstripping that of its trade partners, making American markets a prime target for foreign exporters at the same time that American consumers’ appetite for spending is on the rise. The monthly deficit dipped slightly in August, but over the course of the first eight months this year, imports have climbed by 3.4% to $1.892 trillion; exports have risen by a smaller 3.2% to $1.557 trillion. That has the overall deficit running about 4.2% higher to date this year than in the comparable 2013 period. There’s little reason to expect that differential to change in the remaining months of this year.

The best hope for restraining the rate of the deficit’s rise lies in the increasingly strong performance of the domestic oil and gas industry. As a result of hydraulic fracking and the development of new technology to tap energy sources locked in shale and other formations, the U.S. is becoming one of the world’s leading energy producers. The nation is reaping the benefit -- in the form of greater manufacturing efficiency and falling prices -- from reduced reliance on imported oil. U.S. dependence on imported oil dropped in August to $13.1 billion, the smallest for any month since July 2004. And analysts project that before the end of this decade, the United States will become a net exporter of energy. In the long term, that will provide a significant competitive advantage for U.S. industry, and shelter it against price shocks if geopolitical tensions in the Middle East and elsewhere turn into crises.

Dept. of Commerce: Trade Data

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