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Tool | April 2014

Kiplinger's Economic Outlooks

GDP
2.7% or better in '14
Unemployment
Pace of decline will slow; about 6.3% by end ’14
Interest rates
Short-term rates to stay low through '14
Inflation
Ticking up slightly to 1.8% in '14
Business spending
Spending up 4.5%-5% in '14 as U.S. growth strengthens
Energy
Oil trading between $95 and $100/bbl. by July
Housing sales
Existing homes up 4% in '14, new ones up 16%
Retail sales
About 5% growth in '14
Trade deficit
Narrowing about 5% in '14; oil imports declining
Practical Economics columns
Make sense of the latest data and trends

GDP

Last updated: April 3, 2014

By David Payne

GDP growth in the second quarter should bounce back to a rate of 2.5% to 3%, from a weather-related and inventory slowdown in the first quarter. Economic activity is still on track to grow 2.7% or better for the year. The gains will come as business and consumer confidence strengthen, and Europe begins to emerge from its long slumber, brightening overseas sales prospects, even as continued U.S. government deficit reduction works to restrain growth.

Momentum seems to be picking up this spring. Consumer confidence is bouncing back, climbing above the level it reached before the government shutdown and winter weather took a toll. And an index of manufacturing purchasing managers’ activity reports points to still strongly expanding output. A nice rebound in March supports the belief that winter weather was responsible for most of the depressed economic numbers for January and February.

What’s more, there’s a decent chance of an upside surprise to 2014 growth. Consumer spending and confidence are still way below what would be considered normal levels by the standards of past economic expansions. As job growth returns and consumers feel more secure, a virtuous cycle of spending begetting more consumer income begetting more spending could be initiated. If this occurs, quarterly growth is likely to exceed an annualized pace of 3%. If that doesn’t pan out in 2014, it is nevertheless very likely to happen before the end of 2015.

Dept. of Commerce: GDP Data

More from Kiplinger: 2014 Economic Outlook, State by State

Employment

Last updated: April 4, 2014

By David Payne

Solid job growth of 192,000 in March augurs well for the rest of the year. Along with an upward revision to February gains, it confirms that the paltry gains in December and January were mostly weather-related and not a signal of a longer-lasting lull. Ditto, more overtime hours in manufacturing, which hints at future hiring. Thus, we continue to expect an average monthly gain of 200,000 for the year.

That would mean a total of 2.4 million new jobs in 2014. Growing consumer confidence and a decent rate of GDP growth -- 2.7% -- should keep job growth up. (200,000 additional jobs per month is roughly what’s needed to keep a virtuous circle of rising incomes, output and employment going.)

It is also encouraging that the unemployment rate held at 6.7% in March. Even though a lot of folks entered the labor force, driving up the participation rate a bit to 63.2%, the number of unemployed people didn’t rise much. We look for the rate to gradually drop to 6.3% by the end of the year. Most months won’t see a decline because stronger job growth will continue to bring many of those who haven’t been earning a paycheck back into the labor force, as they search for employment.

Though smaller than initially reported, weather effects in January and February nevertheless played a role in dampening job growth in those months and hiring, especially at retail establishments, bounced back in March. Restaurant and temporary help employment rose most strongly -- about 30,000 each in March. Health care hiring is still not at last year’s levels, but has picked up since almost disappearing in December and January, when there were great uncertainties regarding the rollout of Obamacare. Government hiring was zero in March, continuing the trend of small declines in federal hiring and small increases in state and local hiring each month.

Worker buying power is slowly gaining, as production worker wages are up 2.4% from a year ago and inflation is expected to rise only 1.8% this year. Even if wage growth stays in the 2% range, worker’s real wages are expected to rise, which should have a beneficial effect on consumption.

Dept. of Labor: Employment Data

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Interest Rates

Last updated: March 21, 2014

By Glenn Somerville

Though the Federal Reserve’s steady monthly reduction in its bond buying program is nudging up long-term interest rates, there’s no indication that borrowing costs are about to rise dramatically. The U.S. central bank gives every indication that it will continue to trim the stimulus program in $10-billion increments after each policy session, barring an unforeseen darkening of the country’s economic outlook. On its current course, the Fed will end its extraordinary purchases by year-end.

Markets appear to be anticipating the end of the quantitative easing program with relative calm. That contrasts sharply with the jumpiness investors evidenced in 2013, when mere musing by Fed officials about reducing the bank’s bond buying sent long-term rates soaring. It helps that the Fed continues to stress that it will keep short-term rates low for a considerable time after it winds up its bond purchase program. In addition, reassurances by Fed officials that they are concerned about the labor market’s health and about nurturing a more vigorous recovery is helping to tamp down market fears about an interest rate spike. Moreover, the central bank retains the option of extending or increasing its bond buying to apply new stimulus, if deemed needed.

Look for 10-year Treasury rates to rise to about 3.3% by year-end from around 2.7% now. A rate rise on that scale wouldn’t likely be troubling for the Fed and would represent only the beginning of a return to normal rates after an unusual period of exceptionally low ones. The rate for 30-year mortgages -- now around 4.25% -- will climb to between 5% and 5.5% by the end of this year. That’s a big change from the situation at the start of 2013, when mortgage rates as low as 3% to 3.25% were available, but it’s still very modest by historical standards. People who had to carry mortgages with double-digit interest rates in the late 1970s or early 1980s would find today’s borrowing rates laughably low.

Short-term rates will remain low through 2014, but it looks increasingly as if they will begin to rise in 2015. We don’t expect them to rise significantly until late in the year, however. Fed Chairman Janet Yellen hinted that the first hike could come six months or so after the bond buying program is wrapped up, presumably making the first upward tick in mid-2015. That, however, would depend on the economy’s snapping back from a soft, weather-affected first quarter and onto a stronger and sustained growth path. With the headline unemployment rate already close to the 6.5% that the Fed had previously indicated as a possible trigger, central bankers will also require qualitative improvements in hiring -- such as fewer people in part-time jobs because they can’t find full-time work -- before pushing up the federal funds rate. And that will take time.

Federal Open Market Committee

More from Kiplinger: Interest Rates and the Fed's Taper Plans

Inflation

Last updated: March 21, 2014

By David Payne

Inflation is likely to remain below 2% in 2014. Economic growth will pick up only moderately this year, and general price pressures tend to lag stronger economic growth by a year or more. Prices of goods will continue to be held down by global competition and excess production capacity -- the utilization ratio is still low compared with historical averages. Prices of services have always risen more than goods, and will continue to do so.

Look for the Consumer Price Index in 2014 to post an increase of about 1.8%, measuring from December 2013 to December 2014. That’s up from a hike of just 1.5% from December 2012 to December 2013. Rent increases from stronger housing demand are translating into higher shelter costs in the index, and food prices may pick up a bit this year. But overall the inflation rate will remain moderate. Producer prices, also referred to as wholesale prices, are posting modest monthly gains and aren’t likely to create a surge in prices at the retail level.

Food prices will return to a more normal rate of inflation, rising about 3% by December after a very mild 1.1% increase in 2013. The 12-month rate by February had picked up to 1.4%.

Off-again, on-again energy price inflation dipped in February but looks to be picking up in the spring. Even with a March increase, the price of gasoline is still below its level of a year ago.

Core inflation, which strips out food and energy and is therefore a better measure of underlying structural inflation, rose only 1.6% in the past year and should end the year at about 1.8%, under the Federal Reserve’s target rate of 2% -- the rate it deems necessary to facilitate good economic growth.

Dept. of Labor: Inflation Data

More from Kiplinger: Print-Ready Consumer Price Index Chart

Business Spending

Last updated: April 1, 2014

By Glenn Somerville

Though business spending to expand operations is off to a weak start in 2014, it will strengthen moderately later in the year as U.S. and global economic activity pick up. The subdued spending pattern during January and February -- likely the result of severe winter weather adversely impacting investment plans -- will give way to more-vigorous spending with a return to normal weather. We still anticipate full-year spending will rise by 4.5% to 5%, up from a slight 1.5% gain in 2013. That will be less than the 6% increase posted in 2012, however, signaling continued business caution.

Stronger manufacturing activity will provide a boost for business spending, and there are signs that a spring pickup is developing. First-quarter surveys of purchasing managers show factory business accelerating from the pace in the final three months of last year. New-car sales prospects remain strong and consumer confidence is on the rise, which will be an incentive for businesses to add plant and equipment. Indeed, shipments of core capital goods -- used to calculate the equipment spending portion of the Commerce Department’s GDP measurement -- already edged up by 0.5% in February, after dipping by 1.4% in January. In addition, the capital goods component of Commerce’s monthly durable goods report showed that during February, orders for all types of durables -- goods intended to last three or more years, and ranging from toasters to new cars -- gained 2.2%.

Still, no surge in business spending is likely. Monthly job gains are too modest and wage and salary rises remain slim, so demand to support heftier business spending will gain moderately at best. That means companies will make every effort to avoid risk by adding capacity only as needed.

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

Energy

Last updated: April 18, 2014

By Jim Patterson

If early signs of a political settlement in Ukraine pan out, oil and fuel prices should start to fall later this spring. But so far, traders appear to be taking a wait-and-see attitude towards the deal to ease tensions with Russia.

At $104 per barrel, West Texas Intermediate (WTI), the U.S. benchmark for crude oil, is largely unchanged from a week ago. That’s considerably higher than the $95-to-$100-per-barrel range we’d expect if not for continuing fears that a conflict with Russia will affect Ukraine’s massive oil exports. Otherwise, oil markets look well supplied, with oil exports restarting in Libya after weeks of shutdowns and crude in storage here in the U.S. up sharply.

Gasoline prices could keep edging higher in coming days. But we expect a pullback fairly soon. Now at $3.66 per gallon, the average price of regular unleaded is up four cents from a week ago, and a rise of several more pennies is a good bet. But we see average gasoline prices withdrawing to $3.60 per gallon or a bit less in a few weeks -- perhaps sooner if the crisis in Ukraine simmers down.

Diesel, at $3.96 per gallon, is unlikely to move much in either direction.

Natural gas prices saw another bounce up this week, but a sustained rise is very unlikely. Now trading around $4.78 per million British thermal units, natural gas is up 15 cents from a week ago, likely due to cooler weather in the Eastern part of the country. But with a warm-up on the way, gas demand should drop, taking prices back to our expected trading range of $4 to $4.50. Supplies of natural gas in storage are thin after the long winter, but a big rebound in stocks is likely to begin soon.

Dept. of Energy: Price Statistics

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Housing

Last updated: April 3, 2014

By Gillian B. White

There’s more expansion ahead for the housing market in 2014, with starts and new-home sales continuing to rise at double-digit rates, thanks to tight inventory.

We expect about a 4% increase in existing-home sales, to 5.3 million this year, up from 5.1 million in 2013. Sales growth will decline, however, from the strong 9.3% increase in 2013. That’s largely because of anticipated increases in interest rates plus tighter mortgage rules from the Consumer Financial Protection Bureau, which went into effect at the start of the year. Inventories of existing homes have increased to 5.2 months’ worth of sales (as of February), fairly close to the average in the housing market before the housing bubble -- an indication that foreclosures coming into the market are no longer creating an oversupply of homes.

Sales of new single-family homes, however, are likely to climb by a robust 16% or so, to 500,000 in 2014, on the heels of even stronger gains of 17.0% in 2013 and 20.2% in 2012. Inventories of new homes remain extremely tight. In February, sales of new homes decreased 3.3%, a smaller decline than expected after exceptionally strong gains in January. New homes stayed on the market for an average of just 3.5 months before being sold, far below the 5.5-month average of the past 30 years.

Look for construction of about 1.07 million new homes to begin in 2014, as builders respond to tight inventories. That’s a 15% jump from estimated 2013 starts of about 930,000. The weather-related dampening seen this winter eased in February, with starts declining only 0.2%. We expect starts to pick up as spring wears on and inclement weather tapers off.

Further increases in interest rates are likely to moderate recent strong price gains. In almost all markets across the country, prices rose in 2013. Even cities that had previously been hit hard, such as Detroit, saw double-digit growth. Nevertheless, prices in most regions remain below previous peaks, leaving many homeowners who bought between 2005 and 2008 still underwater and reluctant to trade up or relocate. This continues to have a depressing effect on these markets. In contrast, some regions, particularly portions of the central U.S., which didn’t experience the red-hot appreciation of the housing bubble that the coasts did, are now seeing prices less than 10% below previous peaks. Prices in Denver and Dallas have already hit record highs.

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 15, 2014

By Gillian B. White

Look for retail sales to accelerate this year, gaining about 5% from December 2013 to December 2014 , following a more moderate gain of just over 4% in 2013. A stronger economy, benefiting from declining unemployment plus wage gains, will help.

Supporting the overall growth: strong vehicle sales, picking up almost 5%. Though that pace is well below the double-digit tempo of 2011 and 2012, and somewhat slower than 2013 growth, the sales trajectory remains upward. We look for car and light-truck sales of 16.3 million units this year, up from 15.6 million last year and the best showing for the industry since 2007. Indeed, sales are approaching the average for autos in the years just preceding the recession -- about 16.6 million a year -- and the vigorous pace of gains from the recession low can’t be sustained.

Also bolstering 2014 retail sales: an expected 4% jump in personal income. In addition, consumers will have adapted to the 2013 increase in the payroll tax and will no longer be as hesitant to spend.

Rising temperatures in March, along with the end of a particularly snowy and icy winter, provided a nice boost for retailers, with sales climbing 1.1% from the previous month, after a tepid start to the year. Americans shopped for autos, furniture, clothing and building materials, with gains of 1% or more in each category, thanks to pent-up demand from January and February. Improvement was widespread, with only gas station and electronic store sales declining during March.

Substantial gains are likely to continue in April as the arrival of spring and an improving job market boost spending. The late Easter holiday will also help drive some additional spending during April.

Dept. of Commerce: Retail Data

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Trade

Last updated: April 11, 2014

By Glenn Somerville

Rising domestic production of oil and gas remains the power player in reducing the U.S. trade deficit again this year, though the improvement will be less dramatic than in 2013. Thanks in large part to this production, the monthly gap between imports and exports shrank at an annualized pace of about 4% during the opening two months of this year, and for the full year will come in around 5% lower than it was last year. Though that pales compared with the 11% reduction posted in 2013, it’s still a good performance and will make trade a positive contributor to economic growth this year.

Two factors play into the more modest decline: the economies of some key foreign customers, like China, are straining to grow at the rates they achieved in past years and won’t be as vigorous in buying American-made capital goods and technological products as they have been in the past. It’s a similar story in Europe. A recovery is taking place there, but the region’s still-fragile economy is tempering demand for U.S. exports. Exports to both the European Union and to China weakened in February from January levels. The other consideration is that U.S. GDP growth is expected to pick up after a soft and weather-affected first quarter. That will bring with it a pickup in demand for imported items -- from automobiles to luxury goods.

Look for a gain in exports of about 5% in 2014, while imports will likely rise 3%. Exports dropped by about $2 billion in February -- a reversal after January’s increase -- while imports rose by $1 billion. But severe winter weather played a role, distorting longer-term trends. Petroleum producers sold less product overseas and more product at home than in recent past winters to meet heightened domestic cold-weather heating needs. At the same time, imports of petroleum continued to decline -- further evidence that rising U.S. production is reducing the thirst for foreign oil, which will help shrink the cumulative trade gap as the year wears on. Though aircraft exports were down in February, order backlogs remain in good shape. Lead times for completing aircraft are lengthy, so it’s likely that we will see a rebound in these sales as the year wears on.

Note these other bright spots on the trade front this past winter: Imports of foreign-made cars and other consumer goods were up in February. That’s an indication that U.S. businesses foresee a pickup in consumer demand in the spring, and other economic data, including strong auto sales and strengthening manufacturing activity, support that notion. Plus, now that winter is over and domestic demand will decline, U.S. oil producers have more reason to seek out sales opportunities in overseas markets.

Dept. of Commerce: Trade Data

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