Tool | January 2015
Kiplinger's Economic Outlooks
Last updated: January 16, 2015
By David Payne
Economic growth looks to improve to 3.3% this year -- from 2.3% in 2014 -- and will continue to expand next year.
Lower oil prices will help stoke U.S. GDP growth as consumers shell out less at the gas pump and more on other goods and services, which in turn will spur businesses to increase investment in new production capacity.
The economy will be further spurred by an increase in jobs. The number of job openings is at a 14-year-high and will keep rising, adding to the improving mood of consumers -- who account for two-thirds of the nation’s economy. Housing is also in a recovery mode, with builders expected to increase the pace of new-home construction this year.
On the downside, the strong dollar and sluggish economic expansion abroad will hurt U.S. exporters. And though the Federal Reserve’s interest rate hikes coming this year are expected to be modest, uncertainty about the impact of higher rates will make some investors nervous.
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Last updated: January 9, 2015
By David Payne
The job market should continue to be strong in 2015, perhaps beyond. 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 December, companies hired 252,000 more workers, with gains widespread across nearly all industries. Hiring of health care and food service workers continued at a strong pace. There was a strong jump in construction employment, too.
Look for the unemployment rate to finish this year at 5.3%. This isn’t much below the 5.6% recorded in December. One reason it won’t fall more: The strong job market is likely to entice more folks back into the labor force to try their luck. The number of those who aren’t looking but say they want to work is about 500,000 higher than before the last recession.
Meanwhile, wage growth for nonsupervisory workers is likely to bump up a small amount in 2015 to 2.4%, after running at about a 2% rate in most of the second half of 2014. These wages fell by 6 cents an hour in December, the most in over 50 years. A possible explanation is that the fall in inflation rates, along with gasoline prices, may be causing lower-than-normal cost-of-living adjustments to wages, which are normally done at the end of each year. If it is just a data blip, the dip could be reversed in January.
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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.
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Last updated: December 22, 2014
By David Payne
Consumer prices will rise significantly faster over the 12 months of 2015, but the pickup will be deceptive. Both the higher rate of 2015 -- likely around 2% -- and the under 1% inflation rate of 2014 are due, in large part, to gasoline prices. The big slide in crude oil and gasoline prices muffled inflation in 2014. In 2015, energy prices are likely to rebound a bit but stay low compared with recent-year averages. Thus, while they won’t exert much upward pressure on consumer prices, they won’t have the same deflationary impact that the price drops had in 2014. In contrast, the upward pressure on food prices seen in 2014 should ease in 2015, leading to somewhat lower prices. Already in December 2014, meat prices appear to be heading down.
The core rate of inflation, which excludes food and energy prices, will rise by roughly the same in 2015 as it did in 2014: 1.8%. (The core rate is typically seen as a more accurate gauge of underlying inflation because the often volatile prices for food and energy are removed from the equation.) Look for shelter costs to continue to rise at about a 3% rate, faster than overall inflation, because rents -- used to calculate Consumer Price Index shelter costs -- are climbing strongly. Until housing sales improve and demand for rental units levels off, that trend will continue, probably for at least another year.
Eventually, the stronger economy will boost general inflation, but that’s not likely until 2016 or later. This should give the Federal Reserve more flexibility to manage interest rates without the markets beginning to worry that the Fed is not raising interest rates fast enough.
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Last updated: December 1, 2014
By Glenn Somerville
A gradual pickup in the pace of U.S. economic activity next year will spur stronger investment to expand output, though it will fall short of a spending boom. Figure on about a 7% increase next year in total expenditures on new equipment and facilities to meet both more-vigorous consumer demand for factory-made items, ranging from new cars to home furnishings and appliances, as well as business demand for larger products, such as commercial aircraft and machinery destined for overseas markets.
Though that’ll be a modest jump from the 2014 gain (about 5%), it still falls short of the double-digit annual gains in business spending posted before the Great Recession. While the U.S. economy is securely on track for heftier expansion of about 3% GDP growth next year, concern about weakness abroad and the potential impact that will have on U.S. exports will dampen enthusiasm for spending. Japan is in recession, China’s growth rate is slowing, and Europe is struggling to avoid slipping back into recession.
The main impetus for more capital spending comes from the manufacturing sector. Transportation products in particular will drive the increase. Sales of new cars and light trucks are headed for greater heights — in the neighborhood of 16.4 million to 16.5 million — in 2015. Aircraft makers have backlogs that stretch years into the future, and even railroads are cranking up business — adding locomotives and cars to meet demand for carrying oil, fuel and other petrochemical products.
Moreover, factories are running at 77.2% of capacity (as of October) — far ahead of the low point of 63.9% touched in 2009. Although that’s still short of the 80% mark that is generally seen as a potentially inflation-inducing bottleneck, it is an indication that factories are nearing the point where they must expand to supply increasing demand. That’s confirmed by other indicators of how busy factories are: Monthly shipments of finished goods have crept higher throughout the year. And employment is rising in manufacturing industries.
Don’t be surprised if, when fourth-quarter manufacturing activity is totted up, it shows some softening. After vigorous expansion in the third quarter, demand for some durable goods categories — notably machinery and primary metals — eased in October. It was a surge in demand for defense aircraft that drove orders for all durable goods up in October after two straight monthly declines, and that’s a notoriously volatile category, often with big swings from month to month. There’s no need to worry about a late year lull in growth, though. Unfilled orders continue to grow, and those backlogs will lead to more production in 2015, when economic activity picks up additional steam.
Last updated: January 23, 2015
By Jim Patterson
The national average price of regular unleaded gas is approaching the $2-per-gallon level for the first time since March 2009. Now hovering at $2.04, it figures to slip below the $2 mark sometime in the next week or two. Diesel, now averaging $2.86 per gallon, should also drift lower, to about $2.80 in the near term.
Oil prices remain under downward pressure. And that’s taking a toll on the U.S. energy industry. West Texas Intermediate (WTI), the U.S. benchmark for crude, recently traded at about $46 per barrel, off a bit from a week ago. Trading remains volatile, with WTI notching both large gains and losses this week. Meanwhile, drillers continue to shut down rigs and lay off crews in Western oil states, which should slow or even halt the recent steady increases in U.S. oil output. In fact, crude production logged a slight decrease this week, possibly a sign of more slowdowns to come.
We look for crude to rebound in coming months, taking WTI back to a range of $70 to $75 per barrel this spring. The combination of slowing U.S. output, stronger consumption and the possibility of more turmoil in the Middle East should gradually put a floor under WTI and then send it higher.
Natural gas prices have been edging down, too. Despite healthy gas demand and a weather forecast calling for a cold snap across much of the country, the benchmark price for natural gas slipped a bit this week, to $2.93 per million British thermal units (MMBtu). We don’t see that price moving much, either up or down in coming weeks, though we look for a gradual increase to about $3.25 by spring, as heating demand draws down the amount of gas held in storage. Supplies are already slightly below their average for this time of year.
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Last updated: January 2, 2015
By David Payne
Look for a stronger housing market in 2015. With income and employment rising, demand for housing will increase.
It’s the gradual easing of credit conditions that will break the leftover 2014 sales logjam. This easing will come from changes made by Fannie Mae and Freddie Mac. First, down payments for Fannie and Freddie qualifying mortgages have been reduced from 5% to 3% for creditworthy first-time home buyers. This by itself will not open the floodgates, as most buyers in this category could have got a loan through the Federal Housing Administration (FHA). What is important is that the change signals mortgage lenders that Fannie and Freddie rules are beginning to relax, so lenders can consider making loans to folks that previously would have been ruled out automatically. Moreover, lenders can lower interest rates, since they have less risk on loans sold to Fannie and Freddie.
A second change is further clarification of the circumstances in which Fannie and Freddie can refuse to purchase a loan, pushing it back on the lender. Confusion about this practice has had a surprisingly large effect, slowing lending, particularly for small lenders. They have been the most active in the market in the past few years, and having even one mortgage pushed back on them would tie up a large percentage of their available capital. Meanwhile, for large lenders, billion-dollar penalties levied on some for lax lending have spooked them and they have focused on growing other types of lending, such as business and consumer loans. Federal Housing Finance Agency Director Mel Watt’s comments that lenders shouldn’t be overly concerned about so-called putbacks, and further actions by the FHFA to reduce the uncertainty about the rules should go a long way to improve credit conditions in general.
The impact of these changes will be significant. Lending would go up by an estimated 10% if lenders considered borrowers with FICO scores below 640. For example, the lower FICO scores of immigrants who are accustomed to using cash instead of credit may not accurately reflect their ability to repay a mortgage.
Part of the market is already nearing normal conditions. Sales of existing homes are expected to grow 8% in 2015, and are likely to match or exceed what would have been considered average between 1999 and 2002, just prior to the housing boom and subsequent bust of the last decade. The strong rental market has pushed multifamily construction back to normal levels and now multifamily starts are likely to grow less vigorously—perhaps 5% this year. New single-family home construction and sales, however, are likely to surge by 25% or so in 2015. That will still put them at only about 70% and 60%, respectively, of prebubble levels, and they will not recover fully until at least 2017. Expect starts to hit 800,000 in 2015 and new-home sales, 545,000.
New-home supply shortages will continue to ease gradually. A number of large builders are beginning to shift their focus from high-end to lower-priced houses. The shortage of skilled tradesmen such as carpenters and framers, which has hampered construction in recent years, will abate as wages rise and consistent work attracts more workers back to construction. Many found jobs outside the housing sector when the housing market crashed and construction dried up. In addition, land which developers began to develop a year or more ago will finally become available to build in the coming year, after clearing various regulatory hurdles.
Expect continued moderate home price increases in the neighborhood of 3.5% in 2015 for the nationwide average. That’s a bit less than the 4% gain in 2014. The sharp rebounds of 2012 and 2013 are over and investors are again finding better returns in financial markets.
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Last updated: January 16, 2015
By Lisa Elaine Babb
We expect retail and food sales to climb about 4.2% overall in 2015, similar to the increase in 2014. Though lower gasoline prices will see spending at the gas pump drop 9% for the year, keeping a lid on overall retail sales growth, the extra cash in motorists’ pockets will help boost sales of all other items by an average of 5.6%.
Retail sales will be aided by a better jobs market, higher wages and improved consumer confidence. Among businesses that will benefit: restaurants and bars, as people with more discretionary income in their pockets go out more. Spending at eateries and such will climb 9.2% this year. Auto dealers can expect another good year, though the pace of car sales will slow to about 5% this year, compared with 8% last year. Pickup trucks and SUVs will do well, thanks to low gas prices.
The housing recovery will help to boost sales of building materials by about 7%. Sellers will also spend more at nurseries and home improvement stores to spruce up homes they plan to put on the market.
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Last updated: January 9, 2015
By Glenn Somerville
The U.S. trade deficit with the rest of the world will widen significantly this year — by as much as 10%, or twice last year’s increase. The deficit is growing because continuing improvement in U.S. economic performance will make U.S. markets a prime target for foreign producers. At the same time, growth in China is slowing, and Europe will struggle to eke out modest growth this year. Moreover, the dollar’s continuing appreciation against the euro and many other currencies, including neighboring Canada’s, is driving up the cost of American-made goods and services for foreign buyers. For the full year 2014, a deficit of about $500 billion, up 5% from a year earlier.
We expect the U.S. dollar to remain strong through much of the year, pressuring U.S. exporters. U.S. capital goods producers are particulary vulnerable as foreign buyers pull back on purchasing U.S.-made products. For example, total exports in November fell by 1% to $196.4 billion, with much of the monthly decline centered on capital goods, including commercial aircraft. Export sales to Canada, Mexico, China, Japan and the European Union all dropped in November, and will likely continue to be restrained this year because of the strong greenback. As U.S. exporters are coming under pressure abroad, the U.S. economy is generating more jobs plus increased purchasing power and appetite for foreign-made goods — the recipe for a rising trade deficit.
Falling commodity prices, especially for oil, are both a positive and a negative for trade. Big declines in oil prices since mid-2014 make the bill for imported oil easier to bear. But lower prices also limit what American energy companies earn abroad, just as foreign sales are growing. In November, the U.S. bill for imported oil tumbled by $3.1 billion to $23.1 billion — the lowest since August 2009. Oil prices likely will stabilize at moderately higher levels by spring, in the range of $70-$75 a barrel, but the U.S. will continue to pay less for oil imports as rising domestic production reduces the need for them. Petroleum imports in the first 11 months of 2014 are more than 9% lower than in the comparable 2013 period, while petroleum exports are up by more than 9.5%, spelling the lowest U.S. monthly deficit for petroleum in nearly 11 years.