Oil Prophets

Winter 2015

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20 Oil Prophets Looking at 2015, the domestic HFRQRPLFODQGVFDSH¿QDOO\ORRNV solid if unspectacular. Unemployment rates should keep falling, house prices are likely to rise by 5%, and despite poor global economic conditions, the American economy will strengthen. Moreover, despite a deep partisan divide in Washington, the government will not close down nor will it fail to pay its bills. In addition, the ongoing improvement in household balance VKHHWVWKHLPSURYLQJ¿VFDOKHDOWK of state and local governments, and the likely rise in capital expenditures E\¿UPVDOEHLWQRWYHU\ODUJHDOOEXW insures better economic growth. The only serious domestic problems are ZHDNZDJHJURZWKDQGLQÀDWLRQWKDWLV a bit low. With this in mind, I expect full-year 2015 GDP to come in at no less than 2.85%, a healthy rise from the expected 2.4% GDP growth experienced in 2014, and the strongest since 2005. As for new housing starts, they should rise by about 14%, with total starts coming in at 1.14 million. For all of 2015, single- family starts should total 750,000 up from 640,000, while multifamily starts should hit 390,000, up from 350,000. Housing sales should rise by about 5% and end the year at 5.6 million. Housing inventories should rise by about 200,000 units, to 5.5 months of inventory up from 5.0 months now. Given the improving labor market, expect net new monthly job growth to average roughly 220,000/month, which while down from 240,000/ month in 2014, is excellent given the shrinking size of the working age population. As a result, the unemployment rate should steadily fall from 5.8% today to 5.2% by year end and possibly lower, depending upon the behavior of the labor force SDUWLFLSDWLRQUDWH/)35,IWKH/)35 rises, and that would be a good thing, unemployment may end at 5.3%, but if the LFPR falls, an unemployment rate of 5% would not be out of the question. ,QÀDWLRQZLOOUHPDLQFRPSOHWHO\EHQLJQ ZLWKRYHUDOOLQÀDWLRQSRVVLEO\GULIWLQJ ORZHUZKLOHFRUHLQÀDWLRQZKLFK H[FOXGHVIRRGDQGHQHUJ\VKRZV modest upward drift. The combination of anemic growth in Europe and Japan and declining oil, gas and commodity prices will keep the CPI essentially where it is now, slightly below 2%. Add to this declining import prices due to the rising US dollar and slow wage growth, and core personal FRQVXPSWLRQH[SHQGLWXUHLQÀDWLRQ WKH)HGVSUHIHUUHGLQÀDWLRQPHDVXUH will not exceed 1.7%, well below their 2% target. This will give the Federal Reserve ample time to slowly raise the federal funds rate from where it is now, between 0% and 0.25%, to 1% E\\HDUHQGZLWKWKH¿UVWUDWHULVH probably occurring in June. The thing to keep in mind is that this rate rise, WKH¿UVWLQDGHFDGHLVOLNHO\WREH accompanied by some stock and bond market volatility. As a result of faster GDP growth in 2015, 10-year Treasuries will end the year at 2.7% and 30-year mortgage rates will probably hover around 4.5% DVWKH\LHOGFXUYHÀDWWHQVGXHWR faster rising short-term rates. But a combination of slightly easing credit market conditions and increasing consumer spending due to increased employment and rising wages will keep the economy and the housing market on track despite mildly rising interest rates. Finally, I put the chances of a recession in 2015 at 5%. So look forward to steady economic activity in 2015 and fear not rising interest rates. Elliot Eisenberg, Ph.D. is President of GraphsandLaughs, LLC and can be UHDFKHGDW(OOLRW#JUDSKVDQGODXJKV net. His daily 70 word economics and policy blog can be seen at www. econ70.com. Economic Forecast for 2015: Sunny Days with Occasional Cloudy Periods Elliot Eisenberg, Ph.D., GraphsandLaughs, LLC y sional

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