December 31, 2014 Patrick Oliver-Kelley

The U.S. economy, having found its footing in 2014, will gain momentum in 2015, even as Europe struggles to stay out of recession, Japan remains sluggish and growth in emerging economies slows. The US economy grew at 5% annual rate in July-September, the best annual growth rate since 2003, and up from expected growth of 2.2% in 2014. Worldwide, economic growth is expected to average 3.2% in 2015. Existing home sales continue weak, even low mortgage rates do not appear to attract buyer…yet.
The jobs market is improving and wages too, are improving around the 3% range. With bigger paychecks just more good news for U.S. families, the average household debt-to-income ratio is the lowest since 2002. And falling food and gas prices are leaving more money in our pockets, cash that can boost consumer spending overall, which in turn accounts for 68% of the U.S. economy—setting up a virtuous circle of growth.

Businesses will do their part, increasing spending on plants and equipment by an average of about 7%, up from 5% in 2014. We are in an economic boomlet here in the U.S.

A stronger dollar is a net positive for U.S. growth. It is bad news for U.S. multinational companies, because foreign earnings translate into fewer dollars. Consumer prices may rise at a 2% rate in 2015. Subdued inflation gives the Federal Reserve Board breathing room when it comes to raising interest rates. The Fed will not be forced to do anything it does not want to do.

Short-term rates might not rise at all until the second half of the year, and then only modestly. By year-end, the federal funds rate may slightly up form zero. However, beware of rising variable-loan rates on home-equity loans and on credit cards; rates on certificates of deposit and savings accounts will creep higher, too.

Mortgage rates will edge higher, with 30-year fixed-rate loans averaging about 4.7% by year-end. Home prices should move up gradually in 2015, supported in part by a backlog of young adults eager to get out of their parents’ basements. Maybe 2015 will be the year they finally launch

The Future of Oil

The slump in oil price is good and bad. It is good for consumers, it is a tax cut, and an economic stimulus package, but for producers it is a source of worry. Saudi Arabia is the pivot. It is protecting its market share….at any cost. Leaders of Russia, Iran, and Venezuela, Nigeria as well as the Mid East smaller players are or will soon be, wringing their hands.

New oil is flowing from unexpected sources. Over the last few years, oil thirsty states have curbed demand or made efficiencies, but lesser demanding countries have begun to guzzle vast amounts. Greenhouse gases are increasing and analysts say the price of oil can remain low- $50-70/bbl for a long, long time.

Now the US rivals Saudi Arabia in production. Canada, Brazil, Kenya, Uganda, and Mexico are also getting higher production rates. Demand has not kept pace with the increase in supply and we have yet to see the impact shale production innovation will be in America.

However, with Loonies such as Vladimir Putin, and Venezuela’s Maduro at the helms, geopolitical risks are extreme. Might Putin lash out at the West, or become more unpredictable in the Ukraine? Might social unrest be fomented in Nigeria or in Venezuela? Voters are grumpy with their governments, discontent can turn into anger.

At home, the US economy is resurgent. Heating oil prices are falling and consumer disposable cash is looking healthier. Airlines will be big beneficiaries as will autos, trucks and SUV sales will prosper. Businesses with thin profit margins such as the fast food industry and small business will blossom. Inflation should remain in check.

On the bad side, the energy rich states Texas, North Dakota and Alaska will have fewer jobs, lower tax revenues, and less economic activity overall. Drilling programs will slow or halt.
Smaller OPEC member will suffer economic problems. Power is shifting to China, from producers to consumers.

For now, it is economic advantage USA. Rapidly advancing economies in Asia, Latin America, and Africa will more than fill the void of slowing demand in the West. Any prediction of the end of oil is premature, and the oil age will end, long before the world runs out of oil.

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Comment (1)

  1. Mike Kelley

    Absolutely Right On! I am happy to see America Standing Tall Again!!

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