Tool | December 2013
Kiplinger's Economic Outlooks
Last updated: December 6, 2013
By David Payne
Look for economic growth to brighten in 2014, starting in the first quarter and averaging about 2.6% for the year. The gains will come as business and consumer confidence strengthens and Europe begins to emerge from its 18-month recession, brightening overseas sales prospects. Still, the 2014 economy, like that of 2013, will likely be well below the economy’s long-run potential, four to five years into a recovery.
The sequester and government shutdown contributed to slower GDP growth of only about 1.7% this year. Note that the pickup in growth in the third quarter of 2013, to 3.6% (annualized), was deceptive, as businesses adding to inventories accounted for just a bit less than half (1.7%) of that quarterly pace. While that may indicate newfound sales optimism among businesses, if sales aren’t soon forthcoming, there will be a partial reversal of the inventory building. Because of this and the partial government shutdown in October, we expect fourth-quarter growth to slow to an annualized pace of 1.4%.
Congress remains a potential fly in the ointment. Funding to keep the U.S. government running has been authorized only through January 15, while the debt ceiling has been lifted through February 7. Another government shutdown is not likely, but once again congressional action to raise the debt ceiling and to fund government operations is likely to go down to the wire. Thus, continued uncertainty about government spending plans is likely to put a damper on investment and hiring, at least by businesses that contract with the government.
The Federal Reserve will weigh in next year as well; it is not likely to move before the end of this year. It’s approaching a phase-out of its $85-billion-a-month bond buying program. In anticipation, long-term interest rates have already risen this year by about a percentage point, putting a check on mortgage applications.
Recovery from the punishing 2008-2009 recession remains the slowest of any recovery since World War II. By mid-2014, quarterly growth should reach an annualized pace of 3%, making the economy more durable in the face of challenges that include policy uncertainty at home as well as soft growth among major trade partners. Then, the economy should be able to reliably generate 200,000 or more jobs a month.
More from Kiplinger: 2014 Economic Outlook, State by State
Last updated: December 6, 2013
By David Payne
November’s job report hints at better economic growth in 2014. Another welcome surprise following October’s job gains of 200,000, the November gain of 203,000 net new additions to payrolls provides evidence that job growth is picking up. The figures for the last two months also offer a psychological milestone, since as a rule of thumb, continued job gains of 200,000 a month signal an economy that is enjoying robust health and generating the jobs needed to support better consumption growth. It’s especially heartening that although November job gains were strongest in health care, they were widespread, covering most sectors except government.
Note too, that the number of layoffs is on the decline. The six-month moving average of people leaving their jobs -- voluntarily or not -- is gradually approaching a level more typical of an economic expansion. The big drop from October to November is likely to be an anomaly, reflecting in part the change in status of many government workers who were furloughed in October and went back to work in November.
The November decline in the unemployment rate is probably exaggerated, as well. Federal employees temporarily sent home were counted as unemployed in October, but as employed in November when government funding was restored. In addition, many of the genuinely unemployed continue to leave the labor force, long after the end of the 2008-2009 recession. That phenomenon, along with a rising number of baby boomers retiring, has brought the labor force participation rate down to 63.0% in November; it was 65.7% at the end of the recession.
As job creation starts to pick up, the unemployment rate is likely to stabilize -- bouncing around in the range of 6.9% to 7.2% as people are encouraged to come back into the labor market and look for a job. It won’t begin to make real downward strides again until job growth becomes more vigorous, mid-2014 at earliest.
Jobs created so far this year are overwhelmingly in service industries, including retail, restaurants and health care, where wages are lower and more part-time jobs are offered. Goods producers are keeping a rein on payrolls until economic growth improves. And governments are restrained in their hiring because of budget restraints stemming from the federal sequester and its cascading impact on state and local spending.
Earnings are ticking higher, with average hourly earnings increasing by 4¢ to $24.15, up 2.0% over the past twelve months. Because that exceeds the 1.0% rate of inflation over the same period, real earnings have risen, expanding consumers’ buying power. That should help lift consumer spending over the near term.
The bottom line, however, is that progress in rebuilding labor markets remains grindingly slow. There are still about 2 million fewer jobs now than when the recession began in December 2007 and there’s no hiring boom in sight. Only gradual improvement is likely, as GDP growth picks up modestly next year.
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Last updated: December 9, 2013
By Glenn Somerville
Short-term interest rates will remain low through 2014. There’s little doubt about it, given Federal Reserve officials’ intention to keep the Fed funds rate near zero until a sustained economic pickup is clear -- as long as inflation remains in check. And with core inflation running at less than 2%, there’s no danger of runaway inflation. Although encouraging signs of increased hiring and manufacturing activity point to a better-performing economy in 2014, the economic pace is likely to remain well below levels that would call for higher interest rates. At a historic low, between zero and 0.25%, since December 2008, the short-term Fed funds rate won’t rise significantly before 2015. And then, any increase will come only if the economy has developed enough momentum to bring unemployment well below current 7% levels.
There is more volatility in longer-term rates, where markets call the tune. Investors continue to exhibit some anxiety about exactly when and how the Fed will begin to taper off its $85-billion-a-month bond purchases. That’s likely to start in 2014, and it’s not entirely clear what it will mean for interest rates. In mid-2013, when the Fed mused about reducing its bond buying, term rates quickly ran up, raising concerns about a broad economic setback. Since then, Fed officials have made a point of distinguishing between reducing bond buying and hiking the Fed funds rate, and long-term rates have backed off.
In any case, we expect longer-term rates to rise modestly in 2014 in response to increased buying and selling activity in U.S. housing markets, as well as to a stronger global economy. Indeed, some rates have already shifted higher as market participants prepare for the change. Look for the 10-year Treasury rate to rise slowly through 2014, finishing the year at about 3.3% -- still low by historical standards. Rates for 30-year mortgages, now at around 4.45%, will range between 5% and 5-½% next year. Note that rates of 5%-5.5%, though significantly above the 3%-3.25% rates of 30-year fixed-rate loans available in early 2013, still seem ridiculously low to anyone who bought a house in the 1970s or early 1980s.
Big hikes in long-term rates are unwanted and therefore unlikely, because a strengthened housing sector is seen as vital for spurring a faster pace of recovery. Policymakers won’t want to risk actions that cause a speculative surge in rates and dampen housing markets -- though they will have to speak carefully about policy intentions to avoid spooking financial markets into betting that rates are heading for a higher trajectory.
More from Kiplinger: Interest Rates and the Real Unemployment Rate
Last updated: December 3, 2013
By David Payne
There is still little sign that price pressures are building, and inflation is likely to remain below 2% in 2014. Although economic growth will pick up next year, the unemployment rate is likely to remain stubbornly high, and wage increases, modest. That will restrain incomes and keep U.S. consumers cautious , moderating domestic demand. Slow-to-moderate global growth will continue to make it difficult for companies to push through big price hikes.
Look for the Consumer Price Index in 2014 to post an increase of about 1.8%, measuring from December 2013 to December 2014, up from just a 1.4% hike from December 2012 to December 2013. Chalk up the moderate 2013 inflation figure to a drop in energy prices this year plus smaller increases in food prices than in the previous year. While energy prices may continue to decline in 2014, the size of the drop is likely to be smaller, and food prices may return to a more normal rate of growth. 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.
While U.S. headline inflation rose at only a 1% pace during the 12 months through October, as energy prices dropped and food prices increased modestly, core inflation, which strips out food and energy, was up 1.7%. That’s closer to the Federal Reserve target of 2%-2.5% annual inflation -- the rate policymakers see as necessary to sustain hiring and investment. What’s more, the central bank tracks a slightly different price gauge that typically runs a quarter-point to a half-point lower than core CPI.
Overall, consumer prices ticked down 0.1% in October, following a 0.2% increase in September. Food costs inched upward, while energy prices dropped. Core prices in October also rose just 0.1% for the third month in a row. Prices of used motor vehicles rose for the first time in six months.
More from Kiplinger: Print-Ready Consumer Price Index ChartDept. of Labor: Inflation Data
Last updated: December 3, 2013
By Glenn Somerville
Whipsawed by uncertainty about the fiscal outlook and the risk of renewed political hostilities in Washington, corporate chiefs will boost capital spending in 2014 only modestly. Further clouding the outlook for businesses weighing new spending: 2014 is when the Federal Reserve will begin tapering off its massive bond buying program, and it’s unclear how that will affect borrowing rates.
The latest government report on durable goods orders, for October, underlines the caution businesses feel in the face of questions about Washington’s direction. Overall orders were down after a substantial September gain -- in both cases influenced by aircraft orders -- but the underlying message, once defense and transportation business is excluded, is one of softness in both months. Shipments of nondefense capital goods dropped for a second consecutive month in October by 0.2%. The shipments number is significant because it is used to calculate gross domestic product, and business spending was not contributing to growth. Some product categories scored gains in orders, including new cars, electrical equipment and appliances.
Businesses will want to be ready for an anticipated pickup in global growth. They will want some expanded capacity on hand or ready for quick completion. Growth is likely to be only in the 4.5%-5% neighborhood, however, following a roughly 4% increase in 2013. The wild card will be whether politicians once again start wrangling about the fiscal outlook and the debt limit. Renewal of previous hostilities would keep investment at the low end of the forecast. A decision to stop the battling would offer a much more favorable backdrop for hiring and stronger investment.
On a positive note, Europe is now out of recession, albeit just and growing only slowly. It might be a better market in 2014 for U.S.-made manufactured goods. China, too, is talking about moving to increased consumption-led growth, although it will take time to implement policies for spurring consumption. Substantial optimism about 2014 growth and export prospects is speculative. The evidence of more-aggressive investment and spending by U.S. companies to prepare for more growth is spotty at best.
Last updated: December 6, 2013
By Jim Patterson
Winter cold is starting to boost natural gas in a big way. Prices at the wellhead rose from about $3.75 per million British thermal units (MMBtu) less than two weeks ago to about $4.18 now, hinting at rate hikes to come for residential and commercial gas customers across the country. Colder weather has led to a sharp drop in the amount of natural gas in storage, and the declines figure to continue.
Odds are, prices won’t spike unless a large portion of the country experiences an extended cold snap, but gas users won’t see much price relief, either. We look for gas to trade between $4 and $4.50 per MMBtu over much of the winter heating season.
Crude oil has received a bit of a boost, too. A new pipeline to help lower the glut of oil building up in storage in the midsection of the country prompted oil traders to bid up West Texas Intermediate (WTI), the U.S. benchmark for crude, from $93 per barrel a week ago, to about $97.50 now. And that modest increase has boosted gasoline prices a few cents, too.
But we still look for continued easing of oil and motor fuel prices by year-end. Figure on WTI returning to its recent trading range of $90 to $95 per barrel. Regular unleaded gasoline, now averaging $3.26 per gallon, will likely close out the year between $3.15 and $3.20. Diesel, now at $3.85 gallon, doesn’t figure to move much, either up or down.
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Last updated: November 4, 2013
By Gillian B. White
Gains in the housing market will hold up through the end of 2013 and continue in 2014, but at a more moderate, sustainable rate. In both years, we expect the housing sector to contribute more than half a percentage point to GDP growth. Indeed, in 2014 all major indicators of growth -- sales of new homes, sales of existing homes and building starts -- should rise, for the third year since 2005. Growth will continue to be unevenly distributed across states, however.
For 2014, we expect about a 4% increase in existing-home sales, to 5.2 million, up from nearly 5 million in 2013 -- a healthy 7.5% increase from 2012. At the same time, new-home sales are likely to climb by about 16% to 580,000 next year, following a whopping 36% increase in 2013 and a 20% hike racked up in 2012.
Look for construction of about 1.1 million new homes to begin in 2014, as builder confidence grows and inventory remains tight. That’s an increase from 2013 building starts, which will total at least 950,000. Because of the government shutdown in October, figures for building starts and permits in September 2013 are not yet available. In August, a modest increase in the pace of monthly starts, to an annual rate of 891,000, accompanied a modest decline in the pace of housing permits issued. They dipped 3.8% from July to an annualized pace of 918,000. Overall, the number of permits is likely to continue to exceed sales of new homes, eventually boosting inventory.
Although the pace of existing-home sales declined 1.9% in September, to an annualized rate of 5.29 million, and rising mortgage rates and political and economic uncertainty in October eroded builder confidence somewhat, the tight inventory continues to encourage builders. Housing inventory remained unchanged in September at 2.21 million homes for sale, or five months of supply at current purchasing levels. About six months’ worth of inventory is usually considered a healthy mix of supply and demand.
In some areas, the shortage of inventory is, in fact, significant, leading to multiple bids from buyers and high price spikes. That should cool, however, as mortgage rates continue to creep higher in 2014. Quick sales in high-demand regions, such as California and Arizona, will continue throughout next year, while other areas, such as New York and Florida, continue to face a glut.
More from Kiplinger: Commercial Rents on the Rise
Last updated: November 5, 2013
By Gillian B. White
Look for retail sales to accelerate steadily in 2014, with a gain in the 5.2% to 5.7% range, after a more modest increase of 4.5% this year. A stronger economy, particularly continuing robust gains in auto sales, will help. We expect vehicle sales to pick up by almost 5%, to 16.3 million units, up from about 15.6 million at the close of 2013. That will be the best showing for the industry since 2007, when 16.5 million vehicles were sold. By next year, consumers will have adapted to the increase in the payroll tax and be benefiting from a bit more than a 3% increase in personal income.
Ongoing job creation in the fourth quarter -- albeit at a modest pace -- and the impending holiday season should encourage more spending in the final quarter of the year than was seen during the previous quarter. Significant growth in the retail sector won’t take root until the new year, however. At the close of the first quarter of 2014, sales will top year-earlier figures by around 5.5%. That’s nearly double the pace seen at the close of the first quarter of 2013, when sales topped year-earlier growth by only 2.8%.
In September, overall retail sales dipped 0.1%, the first decline since March. But the decline was largely the result of what was more than likely a temporary drop in auto sales. Autos account for about one-fifth of monthly business They fell more than 2% in September, at least in part because of a quirk in the industry’s calendar. It counts sales for the first two days of September, including the Labor Day holiday, in August rather than in September. August auto sales were positive, rising 0.7% from July tallies.
Core sales, which exclude autos, posted growth of 0.4%, the second-largest monthly gain thus far in 2013. Grocery stores, electronics stores and food service retailers led the way, all climbing 0.7% or more from their August tallies. Restaurant and bar sales grew 0.9% in September, after being flat for most of the year, possibly indicating less belt-tightening among consumers, given that eating out is usually considered to be discretionary spending. And sales at health and personal care stores added 0.4% to their continuing 2013 growth.
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Last updated: December 9, 2013
By Glenn Somerville
Reduced reliance on imported oil and improving global demand will continue to shrink the U.S. trade deficit in 2014. Helped by a late surge in exports, the trade gap for the first 10 months of 2013 is already more than 10% lower than in the comparable period in 2012. That pace is likely to slow in the final months of the year, but a narrowing of the 2012 deficit of $535 billion by something in the neighborhood of 7% is still a good bet. An additional decline of 5% or so is likely in 2014.
Record exports in October point to a gradual pickup in global economic momentum and are helping drive monthly red-ink balances down -- just $40.6 billion in October compared with $43 billion in September. Exports to both China and Europe were up from September levels, and sales to Canada and Mexico picked up, reflecting stronger demand for key categories of U.S.-made goods, from drilling and oilfield equipment to industrial supplies and materials. Though they didn’t climb as swiftly as exports, imports also rose from September to October, both for industrial supplies and materials and for consumer goods. Some of the increased demand arose from stockpiling by U.S. retailers ahead of the Thanksgiving-through-Christmas holiday shopping season.
Despite record shipments overseas, the pace of improvement in year-to-date exports is still modest -- just 2.5% over the first 10 months of 2012. More-robust gains will wait until 2014, when global growth is expected to pick up momentum. Continuing its slow climb out of recession, Europe should account for some modest expansion in U.S. export demand. Continued economic growth in Canada and Mexico will also help.
One particularly bright spot for trade is rising U.S. production of oil and gas. That is helping to both reduce imports of oil and expand exports of liquefied natural gas. The country’s petroleum deficit declined to $10.5 billion in October, from $11 billion in September. An added bonus: U.S. drillers’ expertise in extracting oil from shale is also creating demand for U.S.-made drilling equipment and related services abroad.