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Tool | May 2015

Kiplinger's Economic Outlooks

GDP
2.6% to 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 2.4%; mortgages, 4.1%
Inflation
1% for '15, up from 0.8% in '14
Business spending
Increasing by 4% in '15, down from last year
Energy
Crude oil trading from $60 to $65/bbl. by August
Housing
New-home sales 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: May 1, 2015

By David Payne

Don’t be thrown by the weak first-quarter GDP report. In a replay of last year, harsh winter weather that hindered housing starts and sapped consumer spending is largely to blame for the meager 0.2% growth. Decreased exports because of the rise in the value of the dollar also factor in the sluggish showing, as does a decline in oilfield investment due to the drop in oil prices.

Keep in mind, though, that not all relevant first-quarter data are in yet — and once reported, could result in a revision of first-quarter growth. Full export and import numbers for March will be released on May 5, and business inventory levels, on May 13.

The economy is sure to pick up steam in coming months, improving to 2.6% to 3% for the year as a whole, depending on its strength during the rest of the year. Note that a slow start last year was followed by a strong rebound.

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 consumer outlays 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 24, 2015

By David Payne

Look for the Federal Reserve to bump up short-term rates by one-quarter of a percentage point in September, before taking a wait-and-see approach to raising them further. Despite a 5.5% unemployment rate, Fed Chair Janet Yellen still sees slack in the labor market, noting there are more dangers associated with raising interest rates too quickly than with not quickly enough. She’ll be sure to evaluate the impact of the September increase before moving on. Odds are, another increase wouldn’t come until the Fed’s meeting in December (skipping over the October meeting) and perhaps not until January.

As credit markets prepare for the Fed to lift short-term rates, yields on longer-term debt will perk up as well: 10-year Treasuries will spike a few ticks above where they are now…1.9%...before settling around 2.4% at year-end, while 30-year fixed-rate mortgages will wind up at 4.1%, versus 3.7% now. The end-of-the-year rates will likely persist well into 2016.

There are three reasons why long-term interest rates will stay relatively low for a while, regardless of what happens to short rates. First, consumer prices in the U.S. are unlikely to pick up much anytime soon. Second, European interest rates will probably stay extremely low for a long time. The Fed is not going to want to widen the gap between U.S. and European interest rates too much and risk taking blame for an even bigger rise in the value of the dollar, which is already robust versus many other currencies, hurting U.S. exporters.

Long-term rates in Europe now at around zero will stay low (possibly even dipping into negative territory, joining short-term rates) for as long as the European Central Bank buys up a substantial portion of the European bond market at 60 billion euros a month, creating a shortage in the availability of bonds to investors. The ECB intends to continue to do so until September 2016.

Finally, China’s central bank seems to be committing itself to further monetary easing, as Japan’s central bank did earlier. How much easing both these banks commit to will help determine the global liquidity environment for some time to come.

Federal Open Market Committee

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Inflation

Last updated: April 24, 2015

By David Payne

Inflation will stay low this year, despite a pickup in gasoline prices. 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. Finally, wage increases will continue to be moderate.

The core rate of inflation, which excludes food and energy prices, will rise by about 1.7% in 2015, December to December — nearly the same as 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 4%.

Eventually, the stronger economy will boost general inflation, but probably not until 2016 or later. That scenario will give 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: April 24, 2015

By Glenn Somerville

Less investment by energy exploration and development companies this year will weigh on overall capital expenditures. Look for business spending to grow about 4% this year, below earlier expectations and a tick below last year’s 5% pace. Moreover, the pickup in spending won’t come until well into the second half of the year.

Some big energy services companies such as Halliburton and Schlumberger are continuing to pare equipment budgets in the wake of low oil prices and may keep doing so for at least a few more months.

At the same time, the strong U.S. dollar is softening demand abroad for U.S.-made goods, causing some manufacturers to hold back on plans to expand and upgrade equipment. Also caution flags for U.S. businesses: China’s moderating pace of growth and the continuing uncertainty of European growth, especially while questions remain about heavily indebted Greece’s position in the euro zone.

But more robust consumer spending on goods and services in coming months will encourage companies to invest more to meet demand.

A partial recovery in oil prices by late summer, to around $60 to $65 a barrel, should induce oil and gas producers, as well, to resume a modest pace of investing.

March orders for a wide variety of goods typically associated with higher capital spending — primary metals, fabricated metals, machinery, communications gear, electrical equipment — all weakened from February levels.

New orders for all types of nonmilitary capital goods, excluding aircraft, fell by 0.5% during March — a seventh straight monthly decline that underlines a significant weakening trend for new investment. Shipments of these so-called core goods also dipped in March, an indication that factories were less busy than in February.

On the positive side for manufacturers, sales of new cars and light trucks remain strong, prompting automakers and parts suppliers to maintain or expand plant capacity and upgrade equipment. And aircraft makers have order backlogs stretching on for years.

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

Energy

Last updated: May 1, 2015

By Jim Patterson

Oil prices keep grinding higher. After flirting with $60 per barrel for the first time in months, West Texas Intermediate (WTI), the U.S. crude benchmark, ended the week around $58.50 per barrel, up another buck or so from last week. Demand for refined fuel remains strong; January and February notched the most miles ever driven in the U.S. for that two-month period, according to government data.

Also helping oil bulls: U.S. crude output continues to stagnate, after rising sharply this winter. The number of rigs drilling for oil is still dropping, suggesting that future production could fall as fewer new wells come on line to replace older ones that are starting to dry up.

We see crude prices continuing their slow rise, likely trading between $60 and $65 per barrel by August. But stay alert for bouts of price volatility between now and then. Violence in the Middle East could always cause a brief price surge. Conversely, another short-term price drop can’t be ruled out if demand for motor fuel shows any sign of weakness this spring or summer.

Prices at the pump will tick higher, too. The national average price of regular unleaded gasoline is now $2.60 per gallon, and is likely to reach at least $2.70 sometime this summer. Diesel…also higher, though the rise will be more gradual than for gasoline. The national average for diesel, now $2.82 per gallon, could reach $3 or a bit more this summer.

Natural gas prices perked up a tad this week. At $2.79 per million British thermal units (MMBtu), the benchmark gas price rose on a smaller-than-expected increase in gas stockpiles. But prices will struggle to rise much more, unless hot weather this summer fires up air-conditioning usage and forces gas-fired power plants to work overtime. Barring that scenario, we continue to look for natural gas to trade from about $2.60 to $2.90 per MMBtu in coming months.

Dept. of Energy: Price Statistics

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Housing

Last updated: May 1, 2015

By Rodrigo Sermeño

In a positive start to the spring home buying season, existing-home sales jumped in March to their highest annual rate in 18 months. Sales have increased year-over-year for six consecutive months, reflecting buyer confidence and providing some much-needed release to built-up demand accumulated in recent years.

New-home sales suffered a notable slump, but they remain on track to a solid year. As we expected, new-home sales started slowly in March because of severe weather in many parts of the country. The spring selling season opened with sharp declines in the number of homes built in the Northeast and South. The West registered a slight loss and the Midwest, a modest gain. Overall, new-home sales fell to a seasonally adjusted annual rate of 481,000 in March, from 543,000 in February. But the encouraging sales figures from previous months indicate more underlying strength than the most recent numbers show.

Housing starts are still sluggish, reflecting problems in the construction sector. Though big builders have ramped up construction in recent months, small, cash-strapped builders, which build the majority of new homes in the U.S., are still having a hard time getting construction loans. Many builders also face difficulties in securing loans for acquiring and developing land on which to build, which spells a shortage of buildable lots.

With demand for homes on a steady upward trend amid low inventory, home prices are also headed higher. The number of Americans signing contracts to buy a previously owned home rose for a third straight month in March. Meanwhile, inventories of unsold existing homes remain tight, driving up prices — a trend that will continue in the months ahead.

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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