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Tool | February 2015

Kiplinger's Economic Outlooks

GDP
3.3% 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
1.5% for '15; 0.8% for '14
Business spending
Increasing by 5% in '15, matching '14's growth
Energy
Crude oil trading from $70 to $75/bbl. this spring
Housing
New single-family home starts and sales up 19% in '15
Retail sales
Up 5% 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: January 30, 2015

By David Payne

Fueled by stronger consumer spending, the U.S. economy will grow at a 3.3% clip this year — from 2.4% in 2014 — and will continue to expand next year.

Consumers are energized by the availability of more jobs and by lower energy prices, which are putting more money into their pockets to shell out for other goods and services. Spending by consumers in the fourth quarter of 2014 grew at the fastest rate in more than eight years. Moreover, with unemployment on the wane — further boosting perceptions of economic security — consumer confidence is at a seven-year high.

With consumers spending more, more and more businesses will increase investment in new production capacity. Housing is in a recovery mode, too, with builders expected to increase the pace of new-home construction this year. Though the Federal Reserve has more or less promised to start raising interest rates this year, most likely in the summer, we expect the hikes to be modest.

U.S. exporters, however, won’t have much to cheer about as the strong dollar and sluggish global economic expansion put a damper on sales abroad. Some U.S. manufacturers will also lose sales at home as U.S. consumers opt for cheaper imported products, especially autos and other durable goods.

Dept. of Commerce: GDP Data

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Employment

Last updated: February 13, 2015

By David Payne

The labor market will continue to tighten. Expect monthly job gains in 2015 to average 250,000—about 3.0 million for the year, slightly above 2014’s addition of 2.95 million jobs. These gains will keep incomes and consumption fueling healthy economic growth.

In January, companies hired 257,000 more workers, with gains spread across nearly all industries. Hiring of health care, food service, retail and construction workers continued at a strong pace. Another sign of better times was that November and December job gains were each revised upward, to 423,000 in November and 329,000 in December. Job opening rates continue to climb, indicating likely strength in future hiring.

A tighter labor market foreshadows further strengthening of the economy. Gains in labor income create the consumer spending that economic growth depends on. GDP growth is likely to continue at a rate better than 3% through 2016.

Look for the unemployment rate to finish the year at 5.3%. It rose to 5.7% in January as the labor force swelled with those coming back to look for work. Declines in the rate are likely to slow this year as better job prospects bring more back to look.

A tighter labor market implies higher wage growth. For nonsupervisory workers, wage growth is likely to bump up a small amount in 2015 to 2.4%, after running at about 2% for most of the second half of 2014. However, any pickup in wages is not likely to lead to higher prices for a while.

Dept. of Labor: Employment Data

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Interest Rates

Last updated: January 16, 2015

By David Payne

The Federal Reserve will bump up short-term rates around the middle of the year. By the end of 2015, figure on a federal funds rate of about 0.75% and a bank prime rate of 4%.

Long rates are likely to move less. Expect 10-year Treasuries to end the year around 2.5%. Though short rates depend almost completely on the federal funds rate, long rates and bond prices are affected by other factors as well. A series of dampening influences are keeping them from rising faster. Among them: a slowdown in many of the world’s other economies -- the eurozone, Russia and China -- which has investors flocking to the U.S.

The relative strength of the U.S. economy is nudging up the value of the U.S. dollar versus the euro and most other currencies, helping to hold down expectations of inflation and exerting downward pressure on rates. U.S. inflation rates show little sign of upward movement, even assuming some kind of partial rebound in gasoline prices. Long-term expectations of tame inflation are also supporting bond prices and keeping rates low.

Rates for 30-year fixed mortgages will also see a tamer rise, and should be just 4.4% at year-end. By historical standards, that’s quite low. But after the prolonged recent period of extremely low rates, the new “normal” for rates is probably lower than it has been in past decades.

Federal Open Market Committee

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Inflation

Last updated: February 27, 2015

By David Payne

Inflation will stay low this year. Consumer prices will pick up 1.5% in 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. This will benefit U.S. consumers as manufacturers pay less for raw materials, enabling them to keep the lid on prices of goods produced in the U.S. Other factors: Wage increases will continue to be moderate, and oil prices will stay low.

Some outliers: Medical costs will go up about 4% this year. The cost of shelter will continue to rise at about a 3% rate, faster than overall inflation, 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%.

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.

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 interest rates fast enough.

Dept. of Labor: Inflation Data

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Business Spending

Last updated: February 27, 2015

By Glenn Somerville

A soaring dollar, cheaper oil and soft overseas markets together are sapping early hopes for a significant pickup in business spending in 2015. The combination of adverse factors came together quickly in mid-2014, when oil prices began a steep slide and investors began looking for more certainty by piling into U.S. dollar holdings. The dollar’s sharp appreciation against every other major currency adds to manufacturers’ difficulties in selling abroad because it makes U.S. exports more expensive for foreigners to buy. At the same time, the slump in oil prices has led to a sharp scaling-back in investment plans by U.S.-based oil and gas producers. Look for business spending to grow by 5% this year, matching 2014’s increase. That’s scaled back from earlier expectations of 7%.

Still, business optimism remains buoyant at the start of 2015, largely because U.S. economic growth is gaining strength, generating more demand at home because jobs and income are rising. That provides underpinning for business spending to meet domestic demand, and there is always the possibility that Europe’s economy could add enough strength to make it a better customer for U.S. machinery and other manufactured goods.

In manufacturing, which accounts for the bulk of increased capital spending, some strains are showing. On the positive side, strong sales of new cars and light trucks are encouraging carmakers to add machinery to their production lines or upgrade existing factories to churn out more vehicles. Sales of new cars and light trucks are forecast to hit 16.8 million this year, up from 16.4 million in 2014. Aircraft makers have order backlogs that will keep them busy for years, but softer growth overseas showed up in new-order softness at the start of 2015. In January, Boeing received orders for five new planes, its lowest monthly order tally in two years. Oil prices are off of the bottom, less than $50 a barrel earlier this year, but they’re still volatile and under downward pressure, so producers are slashing capital budgets.

The mixed outlook was evident in orders for costly durable goods during January. Overall orders managed a 2.8% rise after two successive months of decline. Nonmilitary capital goods orders, excluding aircraft, were up a scant 0.6% after falling in December, while shipments of finished goods – a measure of how busy factories are – dipped slightly in January.

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

Energy

Last updated: February 27, 2015

By Jim Patterson

Gasoline prices are up a dime per gallon in a single week. At $2.37 per gallon, the national average price of regular unleaded has risen 34 cents over the last month or so, repeating the pattern of previous years in which pump prices move sharply higher during late winter or early spring. We look for the rise to continue, with gas heading toward $2.50 per gallon — still cheap compared to recent years, but probably still a bit of a shock to drivers. Diesel is also on its way up. Today’s national average of $2.89 figures to reach $3 by spring.

Oil prices remain volatile and under downward pressure. Continuing worries that markets are oversupplied pushed West Texas Intermediate (WTI), the U.S. oil benchmark, under $49 per barrel this week. But we still see a recovery, to a range of $70 to $75 per barrel by the end of spring.

U.S. oil output continues to slow, as the number of rigs drilling new wells keeps falling. In fact, output barely budged this week. Meanwhile, demand for refined fuel remains strong, meaning markets should tighten in coming months, especially as refineries now closed for seasonal maintenance reopen and start processing more crude.

Any hopes for a rally in natural gas prices are fading fast. Despite recent record cold and record-setting demand for gas, the benchmark price failed to even crest $3 per million British thermal units (MMBtu) this week. And now, with warmer weather in the forecast for the Northeast, demand will likely fall considerably, even as U.S. gas production keeps surging. So gas, now at $2.73 per MMBtu, will likely remain under $3 from now into summer.

Dept. of Energy: Price Statistics

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Housing

Last updated: February 6, 2015

By Rodrigo Sermeño

Improvement in the job market and stronger economic growth will spur housing demand this year.

We expect single-family housing starts to expand at a double-digit rate, on a pace to hit 800,000 starts in 2015. Single-family starts reached their highest monthly activity in nearly seven years in December, improving 4.9% to 648,000 units started last year. Nevertheless, the sector has much further to grow before reaching 1.15 million units — the number of single-family starts considered typical for a well-functioning housing market.

Multifamily starts are expected to pick up by 4% this year, to 370,000. Multifamily housing starts have recovered faster than single-family ones and have reached their normal levels, as deferred plans to purchase homes and the resulting need for apartments have generated a strong rise in rental demand.

Sales of existing homes will increase by 8% in 2015, while prices of such homes continue to increase at a moderate rate. We look for an average price increase of 3.5% in 2015, compared with 4.7 percent nationwide in 2014. Lower-valued homes saw stronger price appreciation last year, giving many homeowners in the bottom third of their markets the opportunity to sell. These homes were hit hardest during the recession and the improvement could lead to more low-end inventory available for entry-level buyers.

Changes in government policies will also help the housing market. The Federal Housing Authority (FHA) and government-sponsored enterprises have started to ease some lending standards that were tightened in response to the subprime mortgage crisis. Fannie Mae and Freddie Mac have reduced the underwriting standards on mortgages they guarantee, including allowing loans with as little as a 3% down payment for qualified borrowers. Fannie and Freddie also recently clarified their lender liability guidelines for loan repurchases. This move will likely encourage lenders to ease their underwriting standards and expand credit to creditworthy folks who previously would have been ruled out.

But a recent FHA move could arguably have a more significant impact on the market, particularly for entry-level buyers. The agency just cut its annual mortgage insurance premium by half a percentage point, to 0.85 percent. This will make it easier for buyers with less cash to purchase a home, particularly those with good credit who have been priced out of the market because of the high FHA fees that followed the 2008 housing crisis. The FHA still requires a 3.5% down payment and an upfront mortgage insurance premium. The premium reduction could boost home sales by up to 250,000 units over the next three years.

Existing FHA borrowers will also get a chance to refinance their mortgages. The last time the agency increased its annual premium was in June 2013, so many of those that took out FHA-insured loans after the increase will be looking to refinance. FHA has endorsed around 1.2 million single-family loans since spring 2013. Moreover, the reduction in the annual premium could attract up to 2 million additional renters to the market. These potential buyers, along with many homeowners seeking to upgrade, could result in 140,000 additional home purchases this year. Overall, around 1 million people could benefit from the lower FHA premiums in 2015.

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

More from Kiplinger: Housing Outlook , 2015

Retail

Last updated: February 17, 2015

By Lisa Elaine Babb

Excluding gasoline, retail sales will rise about 5% this year versus a 4% increase in 2014. But factor in sagging revenues for gasoline because of its low price, and retail sales overall will rise closer to 3% for the year.

The national average price of gasoline sank to a record low of around $2 per gallon in January, and while prices are on the rise, we don’t see them topping $3 per gallon this year.

Though off to a slow start, consumer spending will pick up as Americans grow more confident about the recovering economy and job market. Lower gasoline prices will also help to spur a bump up for sales of consumer goods and services. For now, however, Americans appear to be banking most of what they save by paying less at the pump.

As motorists realize that relatively low gas prices are here to stay, they’ll drive more, and thus boost sales of gasoline by buying more of it. They’ll also spend more of their newly accumulating disposable income on impulse buys, including going out to eat more. Restaurateurs and bar owners will see some of the strongest sales growth in a decade.

Also, with home building gaining momentum, expect the sales of building materials to climb 7%, compared with 5% last year. Motor vehicle and parts sales will slow to a 4% growth rate, versus 8% in 2014, because a good deal of pent-up consumer demand has been met.

Dept. of Commerce: Retail Data

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Trade

Last updated: February 9, 2015

By Glenn Somerville

Look for the U.S. trade deficit with the rest of the world to widen significantly this year — by as much 10%. That’s on the heels of a 6% jump in 2014, to $505 million. The reasons are straightforward: Faster growth in the United States is attracting a rising volume of imports, while U.S. exporters continue to struggle with the combined impact of softer growth overseas and a rising dollar that makes American goods more expensive in foreign markets. The trade gap with China jumped 23.9 %, to a record $324.6 billion last year. That’s the largest deficit with any single country.

The dollar’s value against other currencies will remain elevated for much of 2015. Europe is still trying to resolve its debt crisis and will grow only weakly. China is taking new steps to stimulate its slowing economy and is content to see its exports grow. And sales to neighboring Canada and Mexico will continue to be restrained by the strong greenback. That’s bad news for an anticipated recovery in U.S. manufacturing. The shortfall on sales of manufactured goods grew 13% in 2014 to a record $734 billion.

Worth remembering: There are some positive reasons why imports are on the rise, including a strengthening U.S. job market and cheaper gasoline prices. Both give consumers more spending power, helping to boost demand for imports of everything from fashions to cars. That’s a sign of a strong economy. In December alone, imports climbed 2.2% while exports sagged by 0.8%, as the monthly deficit hit $46.6 billion, a two-year high.

The U.S. energy boom kept the 2014 trade deficit from being even larger. Surging production at home is cutting U.S. reliance on imported oil. Petroleum imports dropped by 9.6% during 2014 to $334.1 billion, the lowest since 2009. U.S. petroleum exports climbed by 5.9% to a record $145.7 billion.

Dept. of Commerce: Trade Data

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