Tool | April 2013
Kiplinger's Economic Outlooks
GDP
Last updated: March 29, 2013
Growth is subpar and will continue to be so for some time, but the economy has enough underlying durability to keep growing modestly. The question is how modestly. Current trends of stronger consumer spending and business investment suggest the possibility of increasing momentum later in the year. But continued budget uncertainties and the prospect of less government spending under the budget sequester now in place could hold GDP growth for the year as low as 1.75%.
At this point, it isn't clear how the federal budget sequester, which started on March 1, will play out. The continuing resolution passed by lawmakers earlier this month to keep the government running through Sept. 30 provides the administration some spending flexibility, which may help minimize damage to individual programs and the economy overall. But it keeps the $85 billion of spending cuts in place, so will likely involve work furloughs for some government employees and contractors and reduce spending by state and local governments, as well as by Uncle Sam. It's possible, however, that sequester-related reductions in public services, such as security screening at airports, will provoke enough public anger to force Congress into rethinking the sequester, mitigating the hit to 2013 GDP.
The pace may ease slightly from the first to the second quarter, in any case. Improving housing markets and healthy consumer spending -- on new cars, among other goods and services -- likely boosted first-quarter 2013 GDP growth to about a 2% annual rate, following the soft fourth quarter of 2012. In addition, businesses rebuilt depleted inventories in the first quarter, a positive for growth early in the year. But that will trim the rate of restocking in the spring. And even if the budget sequester is lightened for the remainder of the 2013 fiscal year on Oct. 1, budget battles over fiscal year 2014, which begins in six months, almost certainly will become entangled with the next debt limit debate, and anxiety among businesses and consumers about government budget shilly-shallying will continue.
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Employment
Last updated: April 5, 2013
Dismal job growth in March shows that across-the-board automatic spending cuts, called sequester, are starting to bite the economy and will become more painful as the year wears on. Taking $85 billion of spending out of the economy this year, along with raising Social Security payroll taxes at the start of the year, creates a rolling impact. Only 88,000 new jobs were created in March -- less than half of what had been forecast. Nearly four years into a recovery, this remains an economy vulnerable to shocks, whether internal or externally generated.
There were telling cuts in employment in vulnerable sectors. Retailers, who were hiring fairly briskly at the start of the year, slashed 24,000 jobs in March in evident anticipation that consumers’ lighter pockets -- and job furloughs -- will mean fewer goods and services purchased. Factories cut 3,000 jobs, also after hiring in January and February. The unemployment rate edged down to 7.6% from 7.7%, but not for a good reason: 496,000 people left the U.S. workforce in March. A vibrant economy leads people to look for jobs, not to quit looking. Almost the sole positive note was a backward-looking one: February’s new-jobs total was revised up 34,000 to 268,000.
For the first three months of 2013, job growth has averaged 168,000 a month. Though down from about 183,000 last year, the figure is still high enough to make a case for private sector-led growth, albeit not robust growth. Private industry created 95,000 jobs in March, while federal, state and local governments shed 7,000, for a net 88,000-job gain. With wage gains meager -- up a bare one cent to an average $23.82 in March -- coming furloughs and spending cuts can only mean slower growth ahead and an unemployment rate unlikely to dip much lower than 7.5% by year-end.
Businesses seem willing to hire, but Washington presents an ongoing hurdle for them. Though politicians spared the economy from going over the fiscal cliff at the turn of the year, it then stumbled into sequester on March 1, exposing GDP to a crawling drag on expansion. There still is resiliency in the private sector. Another 18,000 jobs were added in construction, for example, during March. But ongoing doubt about whether, or how seriously, Congress and the administration will get into new battles over raising the debt limit and negotiating long-term deficit reduction acts as a restraint. It affects not just day-to-day economic activity but also businesses’ willingness to commit to long-term expansion, which could create jobs.
Dept. of Labor: Employment Data
Interest Rates
Last updated: March 21, 2013
No reason yet to look for an early end to the lengthy period of extremely low interest rates. As the first quarter draws to a close, Federal Reserve policymakers see the economy performing modestly better, but not vigorously enough to lead them to raise the federal funds rate. Since December 2008, it has been at a historic low between zero and 0.25%. Fourth-quarter GDP barely crept ahead at a 0.1% pace and the Fed wants to keep an easy-money policy in place in an ongoing attempt to stimulate faster growth and ratchet down unemployment more swiftly. Some members of the rate-setting Federal Open Market Committee warn that the Fed may be stoking future inflation, which could destabilize financial markets. But for now, the Fed is sticking with its decision that rates will need to stay exceptionally low well into the future — until it is clear that job markets are healing and the economy has regained a solid footing. That means the prime rate will stay at 3.25% and three-month Treasury bills, around 1%.
Long-term rates could increase modestly later in the year, though. The housing sector is strengthening and steady monthly employment gains, while relatively modest, will draw more attention to the risk of inflation in future. That will put some upward pressure on long-term rates, as will endless speculation about when the Fed will finally decide the easy-money policy has run its course. But with GDP still seen likely to increase less than 2% this year, no big hike in rates is coming. Ten-year Treasury notes will reach about 2.25%, up from their current 2%, and 30-year mortgage rates will edge up to about 3.75% from 3.5%.
There are some hurdles to clear, most of them government-induced. Politicians set aside their feuding over raising the nation’s debt limit at the start of the year, but only to concentrate more fully on battling about budgets. They will pick up the debt fight again soon, as Treasury once more approaches the statutory limit in May. When dueling political parties threatened to bring the country to an historic default in 2011, Standard & Poor’s lowered its AAA credit rating on Treasuries. That move had only a small effect on interest rates. But the remaining two rating agencies have given notice that if the White House and Congress do not get serious about slowing the rate of growth in the nation’s debt, they too will lower the rating. If Moody’s or Fitch downgrades U.S. debt, look for long-term rates to climb by at least half a percentage point. In addition, within financial markets, speculation about the possibility that the Fed might alter its asset purchase program is intense. An alteration is something that would not itself push interest rates up but would fuel the guessing about when the Fed will call an end to easy money. No signal on that timing is coming this year, however.
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Inflation
Last updated: March 15, 2013
Inflation will edge up a bit this year, but not to levels that trigger alarm or higher interest rates. The Consumer Price Index is set to post about a 2.3% rise for all of 2013, up from 1.7% in 2012. Food and energy -- inescapable components of all family budgets -- are the primary drivers. Gasoline prices spiked upward early in the year before moderating, while food prices have risen at a much tamer pace. Core inflation, which excludes volatile food and energy prices, is increasing at around a 2% annual pace -- well within the Federal Reserve's target range for price rises and not enough to lead policymakers to raise rates.
A lingering aftereffect of last year's drought will be higher prices for pork, beef and dairy products. Many farmers culled herds because they lacked feed for them last year, and that will temporarily keep beef prices up. An average family's supermarket bill is likely to rise around 4% this year, a strain on top of higher taxes at the start of the year. Restaurants will be constrained in hiking prices because the economy is growing only moderately. Overall food prices are set to rise about 3.5% after gaining 1.8% in 2012.
After a year of moderation in 2012, gasoline prices jumped early this year to reach a four-month high of $3.78 a gallon near the end of February before declining modestly. Those rises will leak into price data as the year wears on, and the approach of peak driving periods, such as Memorial Day, may again pressure prices upward, so energy costs will be the hardest-to-contain budget item this year.
On the positive side, there are ample reasons for core inflation to remain muted. Monthly job creation remains soft and overall economic growth is still subpar. That, along with uncertainty about how forced budget cuts known as sequestration will apply, is a damper on demand for many items, although new-car sales have been strong. Recovering home prices have pushed owners' equivalent rents higher, but moderate income growth will lead to some pushback against hefty increases. Finally, farm commodity prices will moderate by midyear after the series of spikes that followed last year's severe drought, easing pressure on supermarket prices.
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Dept. of Labor: Inflation DataBusiness Spending
Last updated: March 28, 2013
Look for business fixed investment to firm modestly as the year wears on. But corporate wariness about Washington’s inability to get past political infighting over budgets will hold growth this year to about 4%, half the 8% gain posted in 2012. So far this year, the business investment picture has been mixed. Orders in the opening months have been volatile -- down in January, primarily because of declines in defense orders, before rebounding in February on strong aircraft demand and continuing robust new-car sales. Uncertainty about the outcome of government budget battles and the prospect of another political fight over raising the debt limit continues to sap businesses’ willingness to commit to expansion, though the overall tone of spending is positive.
Growth will be concentrated in a few key areas, however: information and technology, as companies seek to boost output without adding to payrolls. Equipment for drilling and exploration of oil and gas. Sophisticated machine tools, as manufacturing expands. Plus machinery for the thriving auto industry, to make everything from batteries to dashboard electronics. And equipment to meet rising demand from homebuilders -- earthmovers, power tools, etc. Lowe’s, for example, is planning to open 10 additional stores.
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Census Bureau: Durable Goods Report
Census Bureau: Business Inventories
Census Bureau: Construction Activity
Energy
Last updated: April 5, 2013
Oil prices were hit by a one-two punch this week. Data showing an increase in supplies of crude caused a sharp sell-off in West Texas Intermediate (WTI), the U.S. oil benchmark. Shortly after, a lackluster report on U.S. job creation added further downward pressure. Between the two, WTI slipped from $97 per barrel to $92.65 in just a few days.
The drop in crude could bring a brief dip in gasoline prices. Though regular unleaded has barely budged from its current national average of $3.63 per gallon, don’t be surprised if pump prices retreat to below $3.60 in the next several days.
But we believe the decline in both crude and gasoline prices will be fairly short-lived. The beginning of spring and summer travel in May is sure to perk up demand. In fact, recent data on gasoline consumption are already showing a bit of an uptick. And the most recent increase in crude oil supplies was likely driven in part by the closure of an Exxon-owned oil pipeline that ruptured last week in Arkansas. Temporary closures like that can cause extra crude to pile up in storage.
So figure on the average gasoline price hitting $3.75 or a bit higher by early May, as driving picks up. And as for oil, look for WTI to trade between $95 and $100 per barrel through Memorial Day.
Truckers can continue to expect to pay high prices for diesel. At $4 per gallon, the average cost hasn’t fallen much from its late-winter high. And we see it moving up again late this spring, averaging between $4.05 and $4.25 per gallon by May.
Meanwhile, natural gas is trying hard to hang onto its recent price gains. Gas continues to hover around $4 per million British thermal units (MMBtu), due to cold weather in March and higher-than-normal heating demand. But with warmer weather in the forecast for much of the country, demand should drop off, allowing gas supplies to begin rebuilding after their steep winter drawdown. So we see gas prices retreating to $3.60 or less by May.
Dept. of Energy: Price Statistics
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Housing
Last updated: March 29, 2013
Gains in the housing market will solidify this year, adding to the industry’s strong 2013 start. That’s especially good news, as it will help make up for softer government spending and export growth, which had been the stalwarts of the economic recovery. Look for housing to add at least half a percentage point to GDP this year, with all the major indicators of growth rising in 2013. It’ll be just the second year since 2005 that all measurements see positive gains, although growth will be unevenly distributed across states, which are in different stages of recovery.
Overall, we anticipate sales of existing homes to climb about 7.5% from last year's 4.65 million -- the first time in five years that sales will reach the 5-million mark. The pace of existing home sales inched up in February to a 4.98-million annual rate, the highest level since November 2009, when a federal credit for first-time home buyers boosted sales. Growth of new-home sales, which climbed 20% last year, will accelerate to about 36% in 2013, with about 500,000 new homes purchased.
Accompanying the brisk sales of new and existing homes is a sharp decline in the overhang of unsold homes, which hit 4.4 months’ worth of inventory in February. Though up slightly from 4.2 months’ worth in January, supplies are still below the six-month level, which is considered a healthy mix of supply and demand. In some areas, the shortage of inventory is significant, leading to multiple bids from buyers and faster-than-expected price growth. Although inventories will rebound in coming months as the spring listing season gets under way, the tighter supply is spurring quick sales in high-demand regions such as California and Arizona. Other areas, however, such as New York and Florida, remain glutted.
Construction of at least 950,000 new homes will begin in 2013, a 22% jump over last year's 780,000 starts. As inventory continues to dwindle and builder confidence recovers from a three-month slide, look for the pace of starts to climb from the 917,000 annualized rate registered in February. Though less than last year’s 28% increase, the 2013 annual gain will be the fourth in a row for housing starts. Moreover, housing permits climbed to an annualized pace of 946,000 in February, higher than sales -- an indicator that home sales will pick up in the next few months.
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: March 15, 2013
Retail sales growth is likely to level off in coming months before labor market improvements spur growth in the second half. Consumers have largely kept up spending levels -- even increasing monthly retail sales by 1.1% in February -- despite a cut in take-home pay at the beginning of the year. (The expiration of the 2% payroll tax holiday amounted to about $18 to $20 less to spend per family each week.) But many shoppers are dipping into savings and putting more on credit cards to maintain spending.
Expect overall retail sales to climb by about 5% this year, close to last year's 5.2% gain. Consumers will become used to the smaller paychecks and, barring a spike in oil prices or a government shutdown, will increase their spending levels as the year progresses. Increased wage growth, more job creation and improving consumer confidence will result in higher growth in the second half of the year.
But don’t expect February’s 1.1% jump to be repeated. Overall retail sales were helped by higher gas prices, which climbed a seasonally adjusted 10% in the month. Auto sales were up because of pent-up demand and building materials saw gains on the back of a healing housing market. The 0.4% pace of growth for core retail sales -- excluding autos, home improvement and gasoline sales -- is not sustainable without other economic improvements. Most of it came in clothing, general merchandise and online retailers, at the expense of spending at sporting goods, music, and furniture stores, which fell 1.6%, the largest decline since April 2011.
Core retail sales — which exclude two big-ticket items, automobiles and home improvements, plus gasoline sales — won't grow much faster than overall retail sales during the first quarter of 2013. Because the excluded items typically bounce around a lot from month to month, core retail sales tend to provide better insight into overall consumer spending trends. In fact, the fight in Washington over the debt ceiling and sequestration cuts is likely to weigh on consumer sentiment well into the second quarter of the year. That would mean consumer spending wouldn't contribute significantly to higher GDP growth until mid- to late summer, at best.
Dept. of Commerce: Retail Data
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Trade
Last updated: March 11, 2013
Look for the trade deficit to widen by 2% in 2013, presenting a slight headwind to U.S. economic growth. Most of the widening will come in the second half, as improving consumer and business spending drives import gains markedly higher than export growth. Earlier in the year, expect monthly deficits to be on par with January’s $44.4 billion. Though that is 16.5% higher than in December, it is still 15% below the same month a year ago, and lower than the monthly average in 2012. So trade will likely have a limited impact on first-quarter economic growth.
Export growth will be held in check by recession in Europe and moderate growth in China, despite an uptick in demand for U.S. goods and services in January. Food and beverage sales abroad jumped in January, as did automobile and consumer-goods sales. Exports to Europe will strengthen later in the year as euro zone countries return to growth, which we expect in the second half of 2013. Growing optimism is already beginning to push up the value of the euro against the dollar, giving U.S. exports a price advantage. Exports to China are expected to pick up later in the year, but increasing imports from the Asian giant will leave the U.S. with monthly deficits similar to the $27.8-billion gap in January. All told, exports should climb 4% or so in 2013, about the same pace as last year.
We expect imports to increase about 5% for the year, with most of the growth coming in the second half. At least through March, fiscal concerns and tax changes are likely to weigh on U.S. consumer spending, dampening demand for imported consumer goods and automobiles, both of which fell more than 2% in January. Later in the year, increased confidence in the economic recovery will stimulate import demand, ratcheting up growth faster than at last year’s 3% pace.
