Tool | March 2014
Kiplinger's Economic Outlooks
Last updated: February 28, 2014
By David Payne
Economic activity will grow 2.7% or better for the year, despite a weather-related slowdown in January and February. The gains will come as business and consumer confidence strengthen, and Europe begins to emerge from its long slumber, brightening overseas sales prospects. Continued U.S. government deficit reduction will, however, restrain growth.
At the end of 2013, the economy was growing at a moderate 2.4% pace. There was some cool-down from the unexpectedly strong third quarter: Businesses finished adding to inventories for the time being, and previously hot sectors of residential and commercial construction cooled off, at least partly due to worse-than-normal weather. Plus a shutdown-related drop in government spending took a percentage point of growth away in the fourth quarter.
But there are indications of further momentum headed into 2014: Consumption in the fourth quarter of 2013, for example, grew the most in nearly two years and exports surged. Cold-weather effects on construction and consumer spending in the early part of 2014 will wear off by early spring, and a resurgence is likely. Indeed, a modest slowdown in the first quarter of 2014 is likely in any case, with growth accelerating as the year unwinds.
What’s more, there’s a decent chance of an upside surprise. Consumer spending and confidence is 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.
Next scheduled update: March 27.
More from Kiplinger: 2014 Economic Outlook, State by State
Last updated: February 10, 2014
By David Payne
Lower-than-expected job growth in December and January will be offset in the months ahead, and we continue to expect an annual gain of about 2.3 million net new jobs in 2014. Increased business spending, growing consumer confidence, the continued housing renaissance and healthy export gains all add up to an increasingly strong economy that should be able to support net monthly hiring that frequently, if not regularly, tops 200,000. Indeed, the yearly revision of official employment numbers showed 136,000 more jobs were gained than first reported in 2013, bringing to eight the number of months last year that the 200,000 mark was hit.
The recent employment weakness is the result of special factors such as Obamacare, government hiring and weather. For the second month in a row, job gains were less than expected, rising 113,000 in January and 75,000 in December. Health care hiring, a stalwart in recent years, went from a gain of 30,000 in November to a gain of 2,000 in December and nothing at all in January. Hospital employment dropped 9,000 in the last two months. We chalk much of that up to uncertainty over the impact of Obamacare. Government employment dropped 29,000 in January and 14,000 in December. The trend over the rest of this year should be flat to slightly down. Weather affected January much less than December, but could have contributed to the job loss in the retail sector, as snowstorms may have hindered shoppers and stores tend not to hire when foot traffic drops.
It is encouraging that the unemployment rate dropped to 6.6% in January, in spite of growth in the labor force of 523,000. While much of the recent decline in the jobless rate -- now the lowest since 2008 -- is the result of folks leaving the labor force rather than finding jobs, that doesn’t seem to be the case in the latest tally, as almost all of these new entrants found jobs. If not, then the unemployment rate would have risen.
The drop of 0.1 percentage point in January is the result of the number of people out of work for six months or longer dropping by 232,000. The likely explanation is that people previously on extended unemployment benefits ceased hunting for jobs entirely when the extended benefits ran out. Thus the unemployment rolls declined not because people found jobs but because they stopped looking. Counting these individuals would put the reported unemployment rate at 6.7%, the same as in December. Because folks come back into the labor force to look for jobs as job creation starts to pick up, the ratio of wannabe workers to workers rises. So the unemployment rate is likely to bounce around a bit and end the year at about 6.3%.
Meanwhile, worker buying power continues to improve. Average hourly earnings continued their slow but steady upward climb, to $20.39 an hour for production workers, up 2.2% over the past 12 months. Given that inflation rose only 1.5% in the same time period, real production worker purchasing power picked up 0.7%.
Next scheduled update: March 7.
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Last updated: December 20, 2013
By Glenn Somerville
The Federal Reserve's announced tapering of its long-term bond buying in 2014 is likely to push up long-term rates. How much will depend on whether investors take up the slack. If bond market participants step up to the plate, then rate increases will be small over the course of the next year. If not, investor anxiety will push up rates faster.
In mid-2013, when the Fed mused about paring its bond buying, long-term rates quickly ran up a full percentage point. When the Fed announced on December 18 that its first cutback in long-term securities purchases would come in January 2014, long rates rose about 0.1 percentage point. A jump of this magnitude after each Federal Open Market Committee meeting in 2014 would leave rates above 3.6% going into 2015. Of course, rates could rise faster than the Fed is comfortable with and the monetary policymakers could slow down the pace of withdrawal. Increased activity in U.S. housing markets, as well as a stronger global economy, will also exert some upward pressure on long rates.
We expect 10-year Treasury rates to rise to about 3.5% by the end of 2014. The Fed is likely to be OK with an increase on this scale, though not with a much steeper incline. Look for rates for 30-year mortgages -- now at around 4.45% -- to climb to between 5% and 5.5% next year. Note that, although significantly above the 3% to 3.25% rates that were available in early 2013, rates of 5% to 5.5% are still historically very modest. To anyone who bought a house in the 1970s or early 1980s, they’ll still seem ridiculously low.
Short-term interest rates will remain low through 2014 in any case, given Federal Reserve officials’ announced intention to keep the federal funds rate near zero until a sustained economic pickup is clear. 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 late 2015. And then, any increase will come only if the economy has developed enough momentum to bring unemployment well below current 7% levels -- the Fed recently stated that even 6.5% may not trigger a rate increase. Moreover, with core inflation running at less than 2%, there’s little risk that inflation would flare up, the only development that would likely prompt the Fed to alter course.
More from Kiplinger: Interest Rates and the Fed's Taper Plans
Last updated: February 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, 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 the inflation rate will stay at a moderate level. 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.
From January 2013 to January 2014, headline inflation rose at a 1.6% pace. Core inflation, which strips out food and energy, also rose only 1.6%. While goods prices (excluding food and energy) declined an average of 0.3%, services prices (excluding energy) rose 2.3%. Strong price growth in rents, hospital costs, and car insurance may at first glance appear alarming. But this has been true for two years or more already and does not represent a new trend.
Next scheduled update: March 18.Dept. of Labor: Inflation Data
More from Kiplinger: Print-Ready Consumer Price Index Chart
Last updated: February 28, 2014
By Glenn Somerville
Though off to a soft start in 2014, business spending will gain momentum as global growth picks up later in the year. We anticipate a pickup of 4.5% to 5% in equipment spending after a slight 1.5% gain in 2013. Still, business spending aimed at increasing output will trail the 6% rise posted in 2012, as well as the 10% jump in 2011 spending, an indication of how tightly corporate chiefs continue to grip purse strings in the face of relatively soft expansion.
Signs -- still fairly tentative -- that economic growth is strengthening should bolster business confidence and help spur more spending. Economic growth gained momentum during 2013, particularly during the second half, and the economy is free this year from threats of disruptions to government operations and funding, thanks to the two-year budget deal Congress put in place. That relieves corporate planners from worry about government shutdowns and their potential impact on economic activity. They should gain further confidence from forecasts that national economic growth will pick up to about 2.7% this year, from 1.9% in 2013. Europe continues to gradually recover after contracting fractionally in 2013, making the region a better market for U.S. exports. Although emerging-market nations experienced a bout of turmoil as 2014 began, which rattled financial markets, key countries such as China will grow at a 7.5% clip, feeding U.S. export gains.
In addition, a key measure of investment intentions -- orders for capital goods excluding aircraft -- was up solidly in January by 1.7%, pointing to better times ahead. Stronger demand in January for electronics and fabricated metals also may signal that companies intend to upgrade production lines and prepare for increased output. U.S. businesses were running at just 78.5% of capacity during the month, though, down from their average of about 80% over the past four decades. So companies face only modest pressure to update or expand production lines in order to meet existing demand.
Part of the tonic that business spending needs to regain vigor is a pickup in manufacturing activity. That is expected to occur in spring, once the impact of poor winter weather fades. Stronger consumer demand, which would drive businesses to add more plants and equipment, would also help. Consumer confidence has been rising, which is a positive. But monthly job gains continue to be modest and income growth is weak at best, so the outlook for equipment spending remains healthy but far from robust.
Next scheduled update: March 28.
Last updated: March 7, 2014
By Jim Patterson
Another week, another uptick for gasoline prices. At $3.48 per gallon, the average cost of regular unleaded is up about three and a half cents from a week ago. And we look for that climb to continue for at least another couple of weeks, with gas prices likely to top out around $3.60 as refineries close for scheduled maintenance and prepare to start making summer-blend gas grades. Diesel will also edge higher, though at $4.01 per gallon now, we expect future price gains to be fairly small.
The price of crude oil is treading water, at about $102 per barrel for West Texas Intermediate (WTI), the U.S. benchmark. We still expect oil prices to start retreating toward the mid-$90s range this spring, because of relatively high stockpiles and growing domestic production. But simmering geopolitical tensions in Eastern Europe and Venezuela seem to be keeping traders on edge, which is supportive of prices in the short run. By July, we expect crude oil to be trading between $95 and $100 per barrel.
Natural gas customers are finally getting a respite from winter’s price spikes. Though much of the country remains chilly, forecasts for warmer weather are keeping gas prices docile. At $4.65 per million British thermal units (MMBtu), natural gas is holding fairly steady, after zooming past $6 last month, when frigid weather caused heating demand to soar. The approaching spring, combined with rising gas production in the U.S., should keep prices in a trading range of $4 to $4.50 per MMBtu in coming weeks.
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Last updated: February 28, 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. But the pace of existing-home sales will moderate, and worse-than-normal winter weather will show up in starts and sales figures for the cold-weather months.
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 because of anticipated increases in interest rates and tighter mortgage rules from the Consumer Financial Protection Bureau. (The rules went into effect at the start of the year.) Inventories of existing homes remain moderately low at 4.9 months (as of January), 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 January 2014, sales of new homes climbed by 9.6%, helped by a temporary decline in both mortgage rates and median home prices. New homes stayed on the market for an average of just 3.3 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 around 930,000. Robust growth is still likely, despite a weather-induced decline of 15.9% in monthly figures from December to January. Starts will see a pickup in March, when temperatures increase, snow dissipates and building can get under way.
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.
Next scheduled update: March 26.
More from Kiplinger: Commercial Rents on the Rise
Last updated: February 24, 2014
By Gillian B. White
Look for retail sales to accelerate steadily this year, gaining about 5% over the 12 months of 2014 after more moderate growth of just over 4% in 2013. A stronger economy, benefiting from declining unemployment plus wage gains, will help.
Supporting the gains: Strong vehicle sales, picking up almost 5%. Though the pace of growth will continue to slow from the double-digit tempo of 2011 and 2012, the trajectory remains upward, and total sales in 2014 will likely reach 16.3 million units, up from about 15.6 million in 2013 and the best showing for the industry since 2007. Sales are starting to close in on the historical average for auto sales -- about 16.6 million vehicles a year prior to the recession -- and the vigorous pace of gains from the recession low can’t be sustained.
2014 retail sales will also be buoyed by about a 3% increase 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.
Unusually cold and snowy weather once again put a damper on sales in January, making it the second consecutive month of decline. Overall retail sales dropped by 0.4% as most Americans stayed home instead of braving frigid temperatures to eat out in restaurants or shop at their local malls. The biggest declines were in autos and at department stores. Building material and garden supply stores saw the biggest gain, with a 1.4% increase in January: Though cold and snow have a dampening effect on building, they mean an increase in sales for items such as snow shovels, generators and pavement salt.
Weather-related slowing will likely creep into February data, pulling down overall first-quarter sales performance even if sales pick up, as expected, once the weather warms up.
Next scheduled update: March 14
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Last updated: February 7, 2014
By Glenn Somerville
Increased domestic energy production helped narrow the U.S. shortfall on trade with the rest of the world during the past few years and will do so again in 2014. Despite a hiccup in December when exports fell, the deficit for all of 2013 dropped by 12% to $471.5 billion, and we anticipate that it will decline by an additional 5% in 2014.
The pace of the deficit’s decline this year will be smaller than in 2013 largely because a stronger U.S. economy will draw in more imports; we expect about a 3% increase over last year. But export growth will be even stronger in 2014 than in 2013 -- rising about 5% this year, compared with a 3% gain last year, despite some distress in emerging markets as the year started. Sales to some countries will suffer but those that will be hardest hit are not major customers. Broader European markets continue to strengthen modestly, while exports to China held up through December and should continue to do so, even though the pace of the Asian powerhouse’s economic growth will slow slightly this year.
Increased petroleum exports play a big role in the continuing improvement in U.S. trade performance. During 2013, petroleum exports climbed 14% while imports shrank by 7%. Look for the volume of shipments to rise again in 2014, so even if prices fall moderately, the value of petroleum exports will keep growing. In addition, the U.S. shale oil boom is now spinning off additional trade benefits: American expertise in extracting oil is creating demand for U.S.-made drilling equipment and knowledge in China and other countries eager to boost their own production. In addition, as the global economy gains strength, U.S. foreign sales of civilian aircraft and industrial supplies and materials will pick up in 2014.
While December ended on a soft note, with the monthly deficit rising to $38.7 billion from $34.6 billion in November, the global outlook for 2014 remains positive, if a bit lumpy. Traditional leading trade partners Canada and Mexico will grow solidly and remain steady customers. Europe is now out of recession and will grow modestly this year. However, some of its peripheral members struggle with a high sovereign debt load, so they are more likely to be a drag on global expansion than a contributor. On the other side of the world, China is no longer growing at the breakneck double-digit pace of recent years, so Asia’s top economy will be a solid market for U.S.-made goods but a less robust one than previously.
Next scheduled update: March 10.