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Tool | April 2015

Kiplinger's Economic Outlooks

GDP
3% likely in '15, from 2.4% in '14
Unemployment
Falling to 5.3% by end '15
Interest rates
By end '15, 10-year T-notes at 2.5%; mortgages, 4.2%
Inflation
1% for '15, up from 0.8% in '14
Business spending
Increasing by 5% in '15, matching '14's growth
Energy
Crude oil trading from $60 to $65/bbl. by midsummer
Housing
New-home sales, housing starts will rise nearly 20% in '15
Retail sales
Up 4.3% this year, excluding gasoline sales
Trade deficit
Widening by 10% in '15
Practical Economics columns
Make sense of the latest data and trends.

GDP

Last updated: April 2, 2015

By David Payne

Don’t be thrown by what we expect will be a weak first-quarter GDP report from Uncle Sam later this month. It will note growth of just about 1% because of harsh winter weather in the eastern U.S. that hindered housing starts and sapped consumer outlays. An increase in imports, but not exports, because of the rise in the value of the dollar is also a factor in the sluggish showing.

But the economy is sure to pick up steam in coming months, improving to 3% for the year as a whole, a tad below earlier expectations because of the slow start to 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 spending 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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Employment

Last updated: April 3, 2015

By David Payne

Job gains should exceed 200,000 in April and continue at that level for the rest of the year. The addition of just 126,000 jobs in March reflected slow first-quarter GDP growth, which is likely to be reversed 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 the unemployment rate nears 5%, but that probably won’t happen until next year.

Look for the unemployment rate to finish the year at 5.3%. The rate stayed at 5.5% in March, but 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.

As the unemployment rate continues to decline, employers will feel pressure to hike wages. Wage growth is likely to bump up a bit, to 2.2% by the end of the year, after running at about 2% for most of the second half of 2014.

Dept. of Labor: Employment Data

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Interest Rates

Last updated: April 3, 2015

By David Payne

Look for the Federal Reserve to bump up short-term rates by one-quarter of a percentage point in September, with an additional quarter-point increase possible in December. By the end of the year, figure on a federal funds rate of 0.5% to 0.75%, up from 0% to 0.25% now, and a bank prime rate of 3.75%, up from 3.25%.

Fed Chair Janet Yellen will go slow on further increases, however, allowing interest rates to stay relatively low for a while longer. Though she talks about needing to raise rates before inflation picks up, she is clearly sympathetic to the go-slow approach: she still sees slack in the labor market, despite a 5.5% unemployment rate.

Yellen notes that there are more dangers associated with raising interest rates too quickly than with not quickly enough. And the Federal Reserve’s vaunted “forward guidance” to markets on rate policy is turning murkier as the chairwoman steadfastly resists committing to changes too soon, preferring to tie rate increases to data that show firm economic growth.

Such dependence on data is likely to result in a spreading out of rate increases, allowing the Fed to evaluate the effects of any given increase before it takes another step. So if the first increase is decided on at the September 16-17 meeting of the Federal Open Market Committee, as we expect, the second will not occur before the December meeting. The October meeting would not allow enough time for the effects of the first bump to be fully evaluated.

Long rates will likely rise in anticipation of short-rate increases, but not by a whole lot. We see 10-year Treasuries ending the year around 2.5% (from 2.0%) and 30-year fixed-rate mortgages at 4.2% (from 3.8%). Long rates and bond prices are also affected by other factors, including low interest rates in Europe and Japan plus slowdowns in Russia and China, which will keep them from rising faster.

Federal Open Market Committee

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Inflation

Last updated: April 10, 2015

By David Payne

Inflation will stay low this year. Consumer prices will pick up 1% over the 12 months of 2015, compared with an exceptionally low 0.8% increase last year. Inflation will stay well below the Federal Reserve’s 2% target rate as a strong dollar causes prices of imported commodities to decline. Also, manufacturers will be able to keep a lid on prices of goods produced in the U.S. because they’ll be paying less for raw materials. Other factors: Wage increases will continue to be moderate and gasoline prices are likely to stay low compared with previous years.

The core rate of inflation, which excludes food and energy prices, will rise by about 1.4% in 2015, December to December. That’s less than 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.

Some outliers: Medical costs will go up about 4% this year. The cost of shelter will continue to rise at about a 3% rate because rents are climbing. That trend 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 3%.

Eventually, the stronger economy will boost general inflation, but probably not until 2016 or later, giving the Federal Reserve more flexibility in managing interest rates without the markets beginning to worry that it isn’t raising rates fast enough.

Dept. of Labor: Inflation Data

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Business Spending

Last updated: March 27, 2015

By Glenn Somerville

A strong dollar, lackluster domestic demand and soft overseas markets will keep a damper on business spending for at least the first half of 2015. We still foresee a pickup in capital expenditures over the course of the full year, but spending momentum is unlikely to show up until well into the second half. U.S. oil & gas exploration and development companies slashed their capital equipment budgets in the face of the sharp slump in oil prices that set in about mid-2014. So far there is no reason for them to reverse those cuts. Meanwhile, demand for U.S.-manufactured goods appears to be softening as overseas economies struggle to accelerate, and a stronger dollar makes it cheaper for foreign buyers to purchase capital goods elsewhere. We still expect business spending to grow by 5% this year, matching 2014’s increase.

U.S. and global growth are expected to gain steam during 2015, boosted by cheaper oil and by central bank stimulus in Europe and elsewhere. But uncertainty stemming from moderating growth in China and questions about how fast European economies will pick up their pace of recovery is keeping businesses cautious. Eventually, though, consumers will spend more on goods and services, which typically calls for more investment in plants and equipment to meet growing demand.

The manufacturing sector is most directly affected by changes in business investment spending, and it shows some strain at the start of 2015. On the positive side, sales of new cars and light trucks remain robust, which should encourage automakers and parts suppliers to add plant capacity and upgrade equipment. Sales of these vehicles should rise to 16.8 million this year, from 16.4 million in 2014. Aircraft makers have hefty order backlogs; Boeing received orders for 72 new civilian aircraft in February, compared with just five new orders in January.

But new orders for all types of nonmilitary capital goods, excluding aircraft, dropped by 1.4% in February after falling slightly, by 0.1%, in January. Shipments of finished goods — a measure of how busy factories were — also dipped fractionally in each of the first two months of the year. Weak machinery orders accounted for much of the softness in investment goods demand, a direct reflection of the double whammy that a robust dollar and weak growth overseas is delivering to U.S. business spending.

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

Energy

Last updated: April 17, 2015

By Jim Patterson

The bulls won the tug of war this week in oil markets. The price of West Texas Intermediate (WTI), the U.S. crude benchmark, fluctuated quite a bit. But the overall trend was decidedly higher, with WTI rising above $56 per barrel for the first time in months.

Traders are turning more bullish because of growing signs that U.S. oil output is starting to suffer from the big price plunge that began last autumn. Government data showed a small drop in output this week — the second time in three weeks that has happened. Meanwhile, stockpiles of crude in storage barely grew, easing concerns about a glut in supply. And the number of rigs drilling new oil wells continues to slide.

Markets will no doubt remain volatile. But we look for WTI to keep grinding higher, to a range of $60 to $65 per barrel by August. This spring, be ready for sharp price moves both up and down, as markets react to chaos in the Middle East, the financial crisis in Greece and plenty of other overseas problems. In the longer term, a cutback in U.S. oil production and improving demand point to modestly higher prices.

Gasoline prices figure to climb, too, on the heels of oil prices. The price of regular unleaded gasoline, now averaging $2.43 per gallon, is up 3 cents from a week ago, and should rise a bit more. We look for gas prices to top out around $2.70 per gallon this summer — still a good deal for motorists compared with last year. Diesel will sneak up, too, from its current average of $2.78 per gallon to about $3 by the end of summer.

Natural gas prices won’t move much, either up or down. At $2.64 per million British thermal units (MMBtu), the benchmark price is up ever so slightly from a week ago. Demand for natural gas will likely remain low for the next month or two, letting stockpiles build up and keeping prices under control. Look for gas to hold fairly steady in a range between $2.60 and $2.90 per MMBtu in coming months.

Dept. of Energy: Price Statistics

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Housing

Last updated: April 2, 2015

By Rodrigo Sermeño

The relatively low inventory of unsold homes will help to firm up home prices in coming months. With cold weather having slowed the number of homes going on the market in February, inventory increased only relatively slightly in the month. At the current pace of homes going up for sale, it would take just 4.6 months to exhaust the supply of homes on the market.

New-home sales are still on pace to total 520,000 by the end of 2015. Though the harsh February weather deterred some sellers from showing their homes, it didn’t seem to stop many buyers. Sales of new single-family homes increased 7.8% during the month to reach a seasonally adjusted annual rate of 539,000, the highest level since 2008. Keep in mind, though, that new-home sales data tend to be volatile, especially month-to-month figures. So the reported large gain could be revised downward. However, the January figure was revised up — to a rate of 500,000 from an initial estimate of 481,000 — indicating more underlying strength than expected.

Demand for existing homes is clearly on the rise. Pending sales of existing homes rose 12% from a year ago in February — their highest level since June 2013. Likewise, contracts to buy new homes went up in February.

We continue to expect single-family housing starts to expand at a double-digit rate this year. Single-family starts remain well below what are considered healthy levels, spelling room for further growth. The arrival of new homes on the market is sure to boost overall sales.

Builders are enjoying a strong start to the spring selling season, with many of them reporting higher sales amid strong job growth and low mortgage rates. But not everything is rosy for builders; they continue to cite labor shortages, tight credit, and difficulty in acquiring land as the main factors constraining supply.

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: April 17, 2015

By Lisa Elaine Babb

After a slow start to the year, retail sales are gaining momentum. This past winter’s cold weather kept many consumers from venturing out to stores; they opted instead to stash some of their disposable income in savings or use it to pay off debt. But as the snow melted, and with spring in the air, shoppers began to spend more, boosting retail sales by a solid 0.9% in March after three months of declines. Much of the March increase was driven by automobile sales, which jumped 2.7%. Food service sales were up 0.7%.

Excluding gasoline, retail sales will climb about 4.3% this year, compared with 4.8% in 2014. Motor vehicle sales will grow more slowly this year, since the catch-up period from the Great Recession has largely ended. Gasoline prices will inch up some but remain relatively low for the year, keeping a lid on gas station revenues and slowing total retail sales growth to about 2.5%, from 4% in 2014.

Spending in coming months will improve as consumers loosen purse strings in light of an improving job market and rising wages and salaries. Restaurants and bars will see sales rise about 8% this year as folks continue to shell out more of their discretionary dollars on going out. Furniture firms should see sales bump up about 4% as swelling ranks of first-time home buyers look to furnish rooms. And sales of building materials, fueled by construction tied to new-home sales and home improvement projects, will grow by 6%.

Dept. of Commerce: Retail Data

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Trade

Last updated: April 2, 2015

By Glenn Somerville

Despite a narrowing of the trade deficit in the first two months this year, compared with the same period a year ago, the shortfall between exports and imports will widen significantly over the course of 2015 — by as much as 10% from last year’s cumulative $504.7-billion deficit.

The key driving force behind the wider gap will be a disproportionately strong U.S. economic performance, which will draw in rising volumes of imported goods while the more muscular U.S. dollar makes American-made goods more expensive abroad. U.S. exports will suffer as foreign buyers turn to alternative sources for at least some of the goods that they have been importing from the United States.

The now-settled West Coast ports dispute was the key factor behind the narrower trade deficit in February. It held up both imports and exports, which both declined from their January levels and led the deficit in February to shrink by $7.2 billion to $35.4 billion — the smallest in more than five years.

With the dispute over, imports, from cars to electronics, are flowing again, and Americans are in the mood to buy them. European countries and China will pump up sales in the U.S. in order to help their own struggling economies.

Meanwhile, America’s growing energy independence continues to pay off in reduced outlays for imported petroleum from the Middle East and elsewhere. February petroleum imports totaled $16.3 billion, the lowest since September 2004.

The U.S. still runs a deficit on petroleum trade but it shrank to $8.1 billion in February — the lowest since mid-2012 — and increased production of oil and gas within the U.S. is steadily reducing reliance on imported fuel. By the end of the decade, the United States will be not only fully independent in energy trade but also a net exporter.

Dept. of Commerce: Trade Data

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