Tool | June 2013
Kiplinger's Economic Outlooks
Last updated: May 31, 2013
GDP growth will remain subpar until late in the year. A strong early start, driven by consumer spending, faded as furloughs for some civil servants and curtailments in contracts mandated by an $85-billion reduction in government spending, contributed to a third consecutive spring swoon, and continue to take a bite from economic activity in the third quarter.
But there are solid reasons to expect momentum to rebuild by late fall, when businesses and consumers have adjusted to fiscal tightening and the impact of the two-percentage-point hike in payroll taxes that kicked in at the start of 2013. Continuing improvement in the housing market, with building, sales and prices all climbing, should also add some punch to the expansion and give businesses and consumers the confidence to keep putting their spending power into GDP. It is unclear whether the country will enter fiscal 2014, which begins on Oct. 1, still under a sequester that would require continued across-the-board spending reductions. Hopes for a budget deal that could bring an end to sequester have faded and settled into a stalemate. But at a minimum, some of the uncertainty about political jockeying in Washington over spending and another debt ceiling hike should have lifted enough by fall for businesses to plan new investments.
First-quarter GDP growth, recently revised down slightly to an annual rate of 2.4% from 2.5%, put in a less-than-sparkling performance. Still, it was better than the 1.5% or so rate that will persist during the second and third quarters before picking up in the final three months for full-year 2013 expansion of 2%. It is modest growth, but consumers, who drew down savings to help finance the first-quarter surge, need time to restore their finances. One reassuring sign in the revised GDP figures: Inventory accumulation in the opening quarter was smaller than previously thought, raising the possibility of better-than-expected spring and summer growth as stocks are rebuilt. In addition, monthly job gains have picked up. That, plus rising home prices in most of the country, is giving consumer confidence a lift.
Bottom line: The economy’s underpinnings appear solid, notwithstanding a modestly reduced contribution from government spending. The housing and auto sectors will be drivers of economic activity this year and next, giving the private sector a heightened role in an anticipated acceleration of growth during the second half that will carry over into 2014.
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Last updated: June 10, 2013
Job markets continue a slow but steady recovery, adding 175,000 jobs in May, but a hoped-for acceleration in job creation is not yet in sight. The three-month average for new hiring through May of 155,000 points to another year of sluggish 2% growth, although there is no indication of major weakness or recession developing. The fact is that the economy is weathering the impact of both higher taxes and federal spending cutbacks, which are being felt in the form of furloughs for some federal workers. Jobs are being actively shed in government: 3,000 gone in May, 23,000 in the past three months. And employers in many industries are cautious about adding to payrolls, in many cases using temporary workers to fill in.
Consumers are driving most of the hiring that is occurring, while the economy’s industrial side clearly is struggling. With Europe in recession and growth in China softening, U.S. factories face shrinking overseas sales prospects. In May, manufacturing industries cut 8,000 jobs, on top of the 9,000 that were lost in April and the 4,000 that evaporated in March. There is some positive news stemming from better U.S. housing markets, though, as construction businesses added 7,000 jobs in May. The main hiring was in service industries such as retailing, where employment rose by nearly 28,000, and leisure and hospitality businesses (restaurants and the like), which added 43,000 to their payrolls in May.
More robust, sustained hiring — in the area of 200,000 new jobs a month for three or four months — is widely seen as the trigger point for the Federal Reserve to scale back its massive bond buying campaign. The Fed has kept interest rates near zero since late 2008 and has sought to prime the economic pump by adding liquidity through the purchase of both Treasuries and mortgage-backed securities. The necessary level of monthly job growth to start the shift to a more normal monetary policy remains elusive.
But policymakers may take heart from the fact that, at a minimum, slow but sustained growth is beginning to lure discouraged job-seekers back into the hunt. The workforce, made up of those working and those seeking jobs, grew by 420,000 in May. As a result, the unemployment rate ticked up to 7.6% from 7.5% in April. An anticipated pickup in activity for the private sector later this year should spur a stronger pace of hiring and create an opportunity for the Fed to signal it will trim its $85-billion-a-month bond buying program. The monetary gurus won’t actually pare Fed buying, however, until they have firmer evidence of a better long-term trajectory for growth.
Last updated: June 11, 2013
Interest rates will remain low well into the future. Periodic outbreaks of market anxiety and speculation that the Federal Reserve is nearing a shift in its ultra-easy-money policy -- starting to wind down its purchases of long-term mortgage-backed securities and Treasuries or to raise the benchmark federal funds rate -- is off base. There’s certainly no reason to anticipate that the Fed will signal the timing of a pullback in the volume of its purchases (which will be the first step toward a more restrictive monetary policy) at its upcoming June 18-19 meeting.
The slowdown in economic growth -- to around a 1.5% annual pace in the second and third quarters, from 2.5% in the first quarter -- will keep the Fed on hold. So will the virtual absence of any inflation pressure. As long as economic growth labors at a sub-2% growth rate and job markets are still not consistently generating 200,000 or more additional jobs a month, the Fed will conclude that stimulus needs to continue. Indeed, Chairman Ben Bernanke and his colleagues have even raised the possibility that they could increase purchases rather than reduce them. Therefore, the federal funds rate -- at a historic low between zero and 0.25% since December 2008 -- isn’t likely to climb until late 2014 or into 2015, holding the prime rate at 3.25%.
The upward creep in long-term rates bears watching, however. A strengthening housing sector, together with continuing modest monthly job gains, is drawing attention to the possibility of future inflation. Rates for 30-year mortgages topped 4% this month for the first time in a year, and 10-year Treasury rates have ticked above 2%. But much of the pressure seems to be coming from apprehension about the Fed scaling back its bond purchases rather than from any fundamental pickup in economic activity. No big hike in long rates is on the horizon, and 10-year Treasury notes will end the year around 2.25%, not far above their current 2.17% rate, while 30-year mortgages will settle around 4%.
And interest rates could be affected by some wild cards that remain in the deck. Washington politicians temporarily set aside partisan feuding over raising the debt limit earlier this year, and the slowly improving economy -- and concomitant increased tax revenues -- means the next debt limit crisis won’t arise until October or November. But it’s a sure bet that political maneuvering on the issue of the debt limit will resume by fall, once again fanning concerns about a possible U.S. Treasury default. The last time politicians’ failure to act threatened to take the country into default -- in 2011 -- Standard & Poor’s lowered its AAA rating on Treasuries. That move had a minimal effect on interest rates. But if the two remaining ratings agencies, Moody’s and Fitch, are moved to lower their ratings this time, that won’t be the case. A deadlock on negotiations over raising the debt limit would push long-term rates up by at least half a percentage point.
In addition, it’s unclear how financial markets will react when the Fed does eventually announce its plan for altering its bond-buying program. The odds are it will induce at least some volatility, with the potential for pushing rates higher.
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Though prices will edge up a bit later in the year, soft global growth is restraining commodity prices and keeping inflation bottled up. The Consumer Price Index will post about a 2% rise for the full year, a little above the 1.7% registered in 2012, but still well below a level that will trigger interest rate increases. In fact, Federal Reserve officials have registered surprise and a degree of concern that prices so far are running at a level so far under the pace that the central bank considers necessary to support growth and foster hiring and investment. Consumer prices followed up a 0.2% decline in March with a 0.4% decline in April. Both declines were largely because of back-to-back drops in energy costs.
A combination of influences is driving energy prices down: The soft pace of U.S. growth, a cooling in China’s economy and the long-running recession in Europe. That will reverse, at least to a degree, when U.S. growth picks up later in the year and Europe begins to turn the corner, preparing for expansion in 2014. Also later this year, food prices are likely to put some pressure on inflation; they still do not fully reflect the impact of last year’s severe drought. It takes months for the resulting thinning out of animal herds (because producers lack feed for them) to fully show up in reduced supplies and higher prices at supermarkets. So look for pork, beef and dairy products to climb. Restaurants also have been steadily nudging prices up, though there is a limit to how much they can hike menu prices with modest economic growth pinching disposable incomes.
Core inflation, which excludes volatile food and energy products and is closely monitored by the Fed, is muted and will stay that way. Core CPI was up just 0.1% in each of March and April, and it’s unlikely to top 1.2% for the full year. That’s little more than half the 2% rate the Fed targets for core price rises and means the central bank has lots of room to keep adding pump-priming stimulus to the economy. After its last policy-setting meeting at the start of the month, the Fed noted that it might even increase bond buying (part of its quantitative easing policy) before it scales it back. The Fed wants to see the unemployment rate down to 6.5% and inflation running no more than a half percentage point above its 2% target before it raises rates. The soft rate of core price rises shows the Fed is nowhere near its target.
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Business spending is expected to firm in the second half of the year, but the pace of growth will not match last year’s. As a result, capital investment won’t be a key driver of expansion. Corporate chiefs are keeping a tight rein on investment plans while they assess the potential economic impact of reduced government spending and higher taxes, as well as the risk that political squabbling could lead to another debt-limit crisis late this year. So business investment spending will grow by only about 4% in 2013, half of the gain registered last year. Moreover, the month-by-month pattern of new orders for costly durable manufactured goods -- covering everything from production-line machinery to aircraft -- has been choppy so far this year.
Though new durable goods orders registered a solid 3.3% rise in April, shipments of finished core capital goods, used to calculate equipment and software spending for the GDP report, were down 1.5%. That points to a sluggish start to second-quarter business spending. And in a further sign that this fiscal year’s $85-billion sequester is having an impact, defense capital goods shipments slumped 5.6% in April. The defense sector is shouldering a big share of the spending cuts imposed by Washington.
Spending is on the rise mainly for business equipment that creates increasing productivity. Spending on information technology will gain because it enables companies to boost output without adding to payrolls. Equipment for drilling and the exploration of oil and gas will be strong as energy development inside U.S. borders increases. Machinery and sophisticated machine tools will be in greater demand, but spending will be geared to gains in national manufacturing output. Stronger order books in April should lead to production gains later in the summer. Automakers are thriving and will need updated machinery and tools to produce everything from batteries to dashboard electronics. Similarly, a reviving housing sector means builders will need to make investments in business equipment, from pickup trucks to earth-moving machinery and power tools.
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Oil prices are on the rise. Expectations of higher demand this summer had already combined with looming shutdowns in some key European offshore oil fields to nudge up crude prices slightly. And now traders are reacting to signs of escalation in Syria’s two-year-old civil war by further bidding up oil. West Texas Intermediate (WTI), the U.S. benchmark for crude, has gone from $95 per barrel to almost $98 in only a few days, and a further climb to $100 wouldn’t be a surprise.
Pricier crude will gradually filter through to prices at the pump. Though the national average price of $3.63 per gallon for regular unleaded hasn’t budged from a week ago, a small increase is likely by the end of June, to a range of $3.65 to $3.70. Diesel could edge up a penny or two from its current average price of $3.85 per gallon.
But natural gas prices will remain tame, after tumbling to $3.76 per million British thermal units (MMBtu) on signs of weaker demand. We look for gas to trade in a range of $3.80 to $4 over the next month or two, before trending higher as autumn nears and futures traders anticipate the beginning of the next heating season.
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By Gillian B. White, June 12, 2013
Gains in the housing market will solidify this year, adding to the industry's strong 2013 start. That's especially good news, as it will help make up for softer government spending and export growth, which had been the stalwarts of the economic recovery. Look for housing to add at least half a percentage point to GDP this year, with all the major indicators of growth rising. It'll be just the second year since 2005 that all measurements see positive gains, although growth will be unevenly distributed across states, which are in different stages of recovery.
Overall, we anticipate sales of existing homes to climb about 7.5% from last year's 4.65 million -- the first time in five years that sales will reach the 5-million mark, with somewhat stronger growth in the second half than in the first. With inventory unusually tight, the pace of existing home sales climbed 0.6%, from an annualized rate of 4.94 million in March to 4.97 million in April, the highest rate since November 2009. Growth of new-home sales, which climbed 20% last year, will accelerate to about 36% in 2013, with about 500,000 new homes purchased.
In April, housing inventory jumped 12 percent to 2.16 million. That’s 5.2 months' worth of sales, up from 4.7 months’ worth in March. Even with two consecutive months of increase, supplies are still below the six-month level, which is considered a healthy mix of supply and demand. In some areas, the shortage of inventory is significant, leading to multiple bids from buyers and faster-than-expected price growth. Although inventories will rebound as the spring listing season marches on, the tighter supply is spurring quick sales in high-demand regions, such as California and Arizona. Other areas, like New York and Florida, still face a glut.
Construction of at least 950,000 new homes will begin in 2013, a 22% jump over last year's 780,000 starts. As builder confidence grows and inventory remains tight, look for the pace of starts to climb. Housing starts reached an annualized pace of 853,000 in April, a nearly 17 percent decline from March’s pace, which topped 1 million. While starts saw a significant drop, housing permits soared to an annualized pace of 1.02 million in April, 35 percent higher than March’s pace of 890,000. Permits remained higher than sales, an indicator that home sales will continue to pick up in the next few months. Though less than last year's 28% increase, the 2013 annual gain will be the fourth in a row for housing starts.
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Though retail sales are far from sizzling, they’re showing enough strength to allay fears of a sustained consumer spending pullback choking off growth. For all of 2013, a gain in the 4%-4.5% range seems likely, especially in view of strong new-car sales, which are likely to climb by about 5% to 15.3 million units. Although the 4%-4.5% range for all retail sales is less than last year’s 5.2% pace of growth, prospects for acceleration in 2014 are good. By then, consumers will have adapted to tax policy changes made this year, while improved monthly job creation will add more reliably to disposable incomes.
Look for sales in the second and third quarters of 2013 to remain constrained by slow growth in personal income. Take-home pay remains under pressure, and consumers remain cautious about incurring credit card debt to sustain their spending. The recent pickup in the monthly rate of new job creation, together with rising home prices and stock market gains, should encourage more spending in the second half of the year. The benefit isn’t likely to show up until fall, however, because other concerns -- largely uncertainty about lawmakers’ plans for raising the debt limit and dealing with long-term deficits -- continue to make consumers cautious, particularly about longer-term commitments. A more vigorous improvement in the pace of sales won’t appear until the fourth quarter.
The 0.6% rise in May sales (up from a slim 0.1% gain in April) is, nevertheless, reassuring. With increased sales in four out of five months during 2013, consumers are clearly willing to keep spending. Although stronger new-car sales were a help, gains were also seen in a broad range of other products, from building materials to groceries, pointing to some carryover of demand from the first quarter of the year. Moreover, a decline in gas station sales, largely the product of lower gasoline prices, isn’t likely to last. Gasoline sales will probably edge up a bit with both higher pump prices and more driving likely during the summer. Excluding autos, which account for about one-fifth of monthly business, May retail sales climbed 0.3%.
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The U.S. trade deficit will expand modestly this year, by about 2%, as a slowly expanding economy creates demand for imported goods. Expect an uneven monthly trade pattern through the first half of the year, however, as a spring and summer lull in the pace of U.S. growth limits some import demand, while export opportunities are hampered by recession in Europe.
A slower pace of growth in China, as well as recession in Europe, will restrain export growth. For the full year, it will be difficult to match the 4% increase in total exports posted during 2012. Despite these headwinds from abroad, the 1.2% increase in exports in April is encouraging because it included more foreign sales of high-value capital goods, led by telecommunications equipment, electrical products and industrial machines. Computer product exports fell, however, as did industrial supplies.
Imports are growing and likely will keep doing so throughout the year. Consumers are expected to pick up the spending pace, including on imports, more strongly in the second half. That will happen once they have fully adjusted to higher Social Security taxes (which kicked in at the beginning of the year) and to reduced government spending. There were early signs of that in the April trade report, with a 2.4% increase in total imports and a 7.2% gain in consumer goods. Imports from China alone jumped by 21% in April, reflecting strong demand for items from clothing to electronics.
Note that some import patterns are changing, notably for imported petroleum, as the country becomes more self-reliant. U.S. petroleum imports in April were the lowest since November 2010, at $29.6 billion. If forecasts are met for domestic production to exceed imports as soon as later this year, that will help reduce the nation’s trade deficit.