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Tool | August 2015

Kiplinger's Economic Outlooks

GDP
3%-3.5% in second-half '15; 2.5% for the year
Unemployment
Falling to 5.1% by end '15
Interest rates
By end '15, 10-year T-notes at 2.3%; mortgages, 4.1%
Inflation
1.4% for '15, up from 0.8% in '14
Business spending
Increasing by 4% in '15, vs. 5% in '14
Energy
Crude oil trading from $40 to $45/bbl. by year-end
Housing
Single-family starts rising 12% in second half of '15
Retail sales
Up 4.5% this year, excluding gasoline sales
Trade deficit
Widening by 5% in '15
Practical Economics columns
Make sense of the latest data and trends.

GDP

Last updated: July 31, 2015

By David Payne

The economy is poised for solid growth in the second half of 2015. We expect U.S. GDP to grow at a rate of 3% to 3.5% over the final two quarters of the year, a healthy pickup from the 2.3% expansion in the second quarter. (Meanwhile, Uncle Sam revised first-quarter GDP growth this week, marking it at 0.6%, nearly a percentage point higher than was previously reported.)

For the year as a whole, we look for GDP to grow at a 2.5% clip, up a tick from last year’s pace.

Strong consumer spending is playing a big role in fueling the economic resurgence, along with a ramping up of construction activity, including home building. The housing market is in for a good year, propelled by a stronger job market and rising wages plus an increase in household formations and built-up demand.

The economy so far this year is following last year’s script. The slow start in 2014, also largely resulting from harsh winter weather, was similarly followed by healthier gains in GDP in each of the three subsequent quarters.

The biggest drag on U.S. growth going forward? Exports, which will continue to be hampered by the strong U.S. dollar, which makes U.S. goods and services pricier and less competitive in foreign markets. The prospect of a further slowdown in Europe, should Greece exit the eurozone, and the slower-growing economy in China won’t help much, either, on the export front.

Dept. of Commerce: GDP Data

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Employment

Last updated: August 7, 2015

By David Payne

Another solid employment report will keep the Federal Reserve on track to raise interest rates in September. The July report, coupled with another good one next month, should meet the Fed’s requirement of seeing “some” further improvement in the labor market. But because the market is not close to overheating, the hike is likely to be the Fed’s only one for the year.

The employment gain of 215,000 in July was broadly based and might have been higher, except for an unusual dip in temporary help jobs. The unemployment rate stayed at 5.3 percent, which suggests that June’s big unemployment drop is likely to stick. The number of underemployed (those working part-time who want full-time work) dropped yet again, bringing the total unemployment-plus-underemployment rate down from 10.8% in May to 10.4% in July. Over the past 12 months, the number of part-timers who are underemployed and want full-time work has dropped significantly.

Wage pressure is building, but very slowly. Average hourly earnings grew 2.1% over the past 12 months. Wage growth is likely to continue to be slow until the labor market tightens some more. Look for a more noticeable pickup in 2016.

Dept. of Labor: Employment Data

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Interest Rates

Last updated: August 14, 2015

By David Payne

Long-term interest rates should end the year at about 2.3%, just a bit above where they are now. The turmoil in world markets this week as a result of China’s depreciation of the yuan illustrates why U.S. Treasuries will continue to be attractive for a while, despite an expected move by the Federal Reserve to raise the federal funds rate in September. Also, slowing growth in China, Europe and Japan will add downward pressure.

We also expect 30-year fixed-rate mortgages to wind up at 4.1% at the end of 2015, versus 3.9% now.

Here are a handful of reasons why long-term rates should stay relatively low for a while:

● China’s growth is likely to continue slowing, keeping the Chinese central bank committed to easier monetary policy.

● The Fed won’t want to further boost the value of the dollar by making it even more attractive through higher rates.

● While Greece’s situation is stable for the moment, investors will continue to be nervous at the lack of real progress. They will always be ready to run toward the safety of bonds from major economies.

● Consumer prices in the U.S. are unlikely to rev up much anytime soon.

● The European Central Bank will stay on its expansionary path despite improving growth in Europe. The ECB intends to keep buying 60 billion euros’ worth of bonds a month until September 2016, a substantial share of the Eurobond market.

We expect the Federal Reserve to bump up short-term rates by a quarter-point in September. But odds are that will be the only hike this year.

Federal Open Market Committee

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Inflation

Last updated: August 20, 2015

By David Payne

With rental rates on the upswing and gasoline price declines smaller than they were a year ago, overall consumer prices will rise 1.4% this year, compared with the exceptionally low 0.8% increase in 2014.

Even with the uptick, though, consider inflation well behaved, and it will remain so well into next year, courtesy of slow-to-rise wages, despite falling unemployment, and lower commodity prices.

The core inflation rate, which excludes food and energy prices, will be up about 2.2% this year versus a 1.6% hike last year. The increase will be roughly in line with an expected pickup in wages to 2.2% this year, from 2% last year.

The core rate is typically seen as a more accurate gauge of underlying inflation because food and energy costs are typically volatile. Though total price inflation will stay below 2% until 2016, the Federal Reserve is likely to use the jump in core inflation to justify an interest rate hike in September.

Prices for services and prescription drugs are rising the fastest this year: Physician and dentist charges—up 2.5%; hospital costs, 3.5%; and prescription drug costs, 4%-5%. Rents will continue to climb at a 3%-3.5% clip well into 2016, when more folks will opt to purchase homes, reducing demand for rental units. Prices of college tuition and textbooks are likely to go up about 4% this year.

Dept. of Labor: Inflation Data

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Business Spending

Last updated: August 28, 2015

By Glenn Somerville

Despite deep spending cuts in the energy sector, business spending overall is picking up and will likely grow by 4% this year.

The strengthening economy figures to boost manufacturing activity in coming months. July orders for core capital goods, a category that includes nondefense items and excludes aircraft and is therefore seen as a proxy for investment plans, notched a solid 2.2% increase on top of a 1.4% June pickup. That supports other recent data, including healthy new-car sales, increased housing activity and steady employment gains that give companies more confidence to expand and spend on labor-saving technology.

Businesses shelled out the most in July for new machinery, transportation, electrical equipment and communications gear, providing a promising start to the final six months of 2015, after a soft first half when investment was virtually unchanged from a year earlier. Shipments of finished goods are rising at a mediocre rate, however, an indication that factories are still at far less than full capacity — hence the modest 4% increase in spending for all of 2015. That’s a far cry from the double-digit annual increases in years prior to the Great Recession. The strong U.S. dollar, relative to many other key currencies, is continuing to produce a drag on foreign trade, resulting in a pileup of inventories and a drag on production. That will remain the case until sales growth picks up enough to persuade corporations to invest more strongly for expansion — possibly by the fourth quarter, setting up brighter business investment prospects for 2016.

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

Energy

Last updated: August 28, 2015

By Glenn Somerville

A two-day rally at the end of this week sent oil prices soaring above $45 per barrel, but we think the upswing is temporary and that prices will settle back down within the next several days.

Short-term concerns, including worries that Tropical Storm Erika was headed toward oil and gas installations on the U.S. Gulf Coast, rattled traders. There was also short-covering taking place as hedge funds rushed to cover bets they had made earlier that prices would keep dropping. That added to price volatility, but underlying economic fundamentals, including slower growth in China and ample energy supplies, argue for the surprise rally to be a short-lived one.

Dept. of Energy: Price Statistics

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Housing

Last updated: August 28, 2015

By Rodrigo Sermeño

Home construction continues to show signs of improvement. Housing starts are up nearly 12% from the end of last year, with most of the gain happening in the past few months. The improvement is largely concentrated in multifamily buildings — not surprising, given the increased demand for rentals. Despite picking up in recent months, single-family construction remains significantly below its pace before the housing bubble burst. Overall, the last couple of months have shown steady improvement in residential construction. As a result, home builders are feeling confident. In August, the National Association of Home Builders’ confidence survey reached its highest level since November 2005.

We expect the improvement to continue. The number of building permits has risen this year, soaring to a seasonally adjusted 1.33 million starts in June before dropping a bit in July. Presumably, construction activity will get stronger over coming months as permits lead to starts.

Note that builders are facing higher prices for skilled labor and lots, due to the tightening job market and the shortage of lots ready for construction. By contrast, material costs have remained subdued as global appetite for them has slowed. Builders report that credit for acquisition, development and construction has eased a bit in recent months.

Robust demand will likely result in the best year for home sales since 2008. July new-home sales rose 5.4% from the previous month and 26% from a year ago. New home inventories increased in July to 218,000, the highest level in more than five years. That suggests that builders expect sales to pick up further. Existing-home sales have remained at the highest level since February 2007 for the past three months.

Not all the housing news is good, though. The share of first-time home buyers has fallen for two consecutive months and hit its lowest level since January last month. Tight credit, steep rents and high student debt levels are among the factors keeping some potential buyers on the sidelines. Another blemish among housing indicators: the low inventory of existing homes for sale. The shortage has budged in recent months, but the level remains below what is considered normal in a healthy housing market. Total housing inventory shrank a little in July; it decreased 4.7% from a year ago. At the current sales pace, the unsold inventory in July represents a 4.8-month supply. Typically, a six-month supply is viewed as necessary to maintain a balance between supply and demand.

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: August 14, 2015

By Lisa Elaine Babb and David Payne

Look for retail sales to gain steam in the second half of the year, a boon for retailers and the broader economy. After a flat first half, consumer spending is ticking up because of better job opportunities and moderate wage gains, and will maintain a steady pace well into the holiday shopping season. Retail sales growth, excluding gasoline, will be around 4.5% for the year, down slightly from 4.7% in 2014.

Motor vehicle, restaurant and building materials sales will continue to perform better than expected for the rest of 2015. However, because many shoppers will opt to shell out for big-ticket items such as autos, other nongasoline sales will see only moderate growth, at about a 3% rate. Low gasoline prices will cause gasoline sales in dollar terms to depress the headline retail sales number for 2015 to around only 2.5% growth.

July sales bounced back with healthy growth after a June lull. Sidewalk sales provided a much-needed boost for many retailers in July, luring savvy shoppers with discounts and promotions. This was especially true for shoe retailers. They cashed in on families looking for back-to-school deals.

Barbecues and outdoor activities spelled strong sales for liquor, deli meats and sporting goods.

Dept. of Commerce: Retail Data

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Trade

Last updated: August 7, 2015

By Glenn Somerville

The U.S. shortfall on trade with the rest of the world will widen significantly this year, primarily because of the dollar’s soaring value. The greenback has appreciated by about 20% against such major currencies as the euro, the yen and the Canadian dollar over the past year, hobbling exports and giving a lift to imports. Everything points to the dollar’s value remaining elevated, especially with the Federal Reserve set to lift short-term interest rates later this year, making dollar-based investments more attractive. Halfway through 2015, the deficit was only slightly higher than during the first six months of 2014, but it will climb more steeply in the second half.

We expect the full-year deficit to swell by 5% over 2014, to about $535 billion. Among the factors: European economies are growing sluggishly. China’s growth is losing momentum. And resource-reliant economies such as Canada and Mexico are being restrained by low prices for oil and other commodities. Their currencies are unlikely to rebound against the U.S. dollar for some time, keeping U.S. export prices high while lowering the cost of imported goods.

In June, the monthly deficit climbed 7.1% to a three-month high of $43.8 billion. Exports shrank for a second straight month, while imports increased from May levels. Robust domestic demand drew record imports from the European Union as well as higher monthly totals from China, Canada and Mexico. Foreign sales of high-value capital goods such as telecommunications and medical equipment dropped in June, while Americans bought more pharmaceuticals, oil, automobiles and cellular telephones from abroad. U.S. job growth is strong enough to support increased spending, so import levels will likely remain buoyant.

Notwithstanding a pickup in both import volumes and prices during June, oil remains a bright spot in the overall trade picture. The monthly deficit on oil trade rose to $7.29 billion, from $5.75 billion in May. But that was less than half the $14.8-billion deficit posted in June 2014 and the long-term trend for America’s energy bill is decidedly downward. By the end of the decade, expect the United States to be not just fully independent in energy supplies but a net exporter to the rest of the world.

Dept. of Commerce: Trade Data

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