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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: June 24, 2015

By Glenn Somerville

We still see business spending expanding by 4% this year, despite hitting another soft patch in May, when orders for costly long-lasting goods fell 1.8% on the heels of a 1.5% drop in April.

Weak orders for new commercial aircraft accounted for much of the slack in both months, but there are indications that demand has picked up this month. Key producer Boeing has a healthy order backlog, in any event. The best reason for optimism about the months ahead: Orders for core capital goods, a category that includes nondefense items and excludes aircraft, climbed by 0.4% in May after weakening 0.3% in April. The number is seen as a proxy for company spending on equipment and software, so the modest pickup in May is encouraging for the longer term even if it doesn’t point to assembly lines humming until later in the year.

By late fall, we expect corporate purse strings to loosen modestly enough to accommodate more investment. U.S. labor markets are tightening, supporting stronger income growth and spending by consumers. Sales of new cars and light trucks have held up well, inducing carmakers to maintain or expand capacity and to keep modernizing plants. Moreover, the housing sector is showing solid signs of rebounding from a soft, weather-plagued start to 2015. The housing recovery will hike demand for a range of manufactured goods from trucks to tools and industrial machinery.

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

Energy

Last updated: August 21, 2015

By Jim Patterson

For oil markets, it’s “Look out below!” Crude prices continued to get hammered this week by a confluence of bearish factors: The slowing economy in China; falling foreign currencies that are pushing up the value of the dollar, making dollar-denominated oil more expensive for foreigners; and oil supplies outstripping demand. West Texas Intermediate (WTI), the U.S. crude benchmark, is now trading at just above $40 per barrel and threatening to head lower.

We don’t see an oil price rebound in the offing anytime soon. In fact, WTI could even slip toward $30 per barrel in the short term, though we think prices wouldn’t stay that low for long. Unless the global economic outlook worsens substantially, look for WTI to end the year somewhere between $40 and $45 per barrel.

The price of gasoline is also headed south. At $2.63 per gallon, the national average price of regular unleaded gasoline is off only 2¢ from a week ago, as a refinery outage in the Midwest caused gas prices in certain areas to jump. But we think the downward national trend will gain steam and send the national average price down to about $2.50 per gallon before Labor Day weekend, with more declines likely as September progresses.

Diesel fuel will also cost less in coming weeks. The current national average price of $2.64 per gallon is likely to drop by at least a nickel as September arrives.

Even natural gas prices are under downward pressure, which is a switch from recent weeks, when gas prices were largely unchanged or even ticked up slightly. At $2.68 per million British thermal units, the benchmark gas price is off slightly from last week, despite signs of strong summertime demand from electric power plants that run on gas. But we expect gas prices to gradually move higher as fall approaches, heralding the start of the heating season.

Dept. of Energy: Price Statistics

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Housing

Last updated: August 3, 2015

By Rodrigo Sermeño

With the economy revving up, more and more college grads and other young people are opting to move into a place of their own, boosting household formations and, in turn, the housing market. Rising demand for apartments is pushing up rents, and that, along with relatively low interest rates, is encouraging more renters to buy. Both trends are good news for builders breaking ground on new single-family homes as well as condos and apartments.

The increase in renters pushed the U.S. rental vacancy rate in June to its lowest level since 1987, while rents matched their largest year-over-year increase since late 2008. Strong demand for apartments drove multifamily starts up 29% in June to 489,000 units — the highest since 1988. We expect housing starts overall to grow 8.5% in the second half of 2015, compared with 1.4% in the first half. Single-family housing starts will pick up their pace of growth to 12% from -0.8% in the first half, while multifamily starts slow to a 3% rate from 5.5%.

Though access to credit is still a hurdle, first-time home buyers are finding it a bit easier to get a mortgage. And as more first-time buyers enter the market, more current homeowners will put their homes on the market and trade up. The expanded inventory of homes will improve the variety of choices for buyers and encourage even more people to shop for a home.

Look for sales of existing homes to rise 11% and new-home sales, 8% in the second half of 2015, compared with 1.7% and 12% in the first half, respectively.

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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