The outlook for U.S. growth remains cautiously positive. Strength in the housing market, exports to emerging markets and increased domestic oil production is hampered by uncertainty. Both families and businesses are hesitant to purchase anything that requires a long-term commitment. That's one reason why companies are resistant to hiring and purchasing capital equipment. As a result, the Federal Reserve predicts moderate improvement. However, these predictions have become more gloomy as the economy shows less robustness.
GDP growth was revised down from the Fed's last meeting. The latest outlook is:
- 2014: 2.1 - 2.3%
- 2015: 3.0 - 3.2%
- 2016: 2.5 - 3.0%
- Beyond: 2.1 - 2.3%
The unemployment rate will drop to between 6.0 - 6.1% by the end of the year. That's better than Fed's 6.7% target. After that, it will continue to fall to between 5.4 - 5.7% in 2015, and 5.1 - 5.5% in 2016. This is forecast is getting more optimistic as time goes on. Unfortunately, many of the jobs added are in low-paying retail and food service industries. This means structural unemploymenthas increased, as many people have been out of work for so long that they'll never be able to return to the high-paying jobs they used to have. Fed Chair Janet Yellen points out that there are a lot of part-time workers that would prefer full-time work that are boosting the numbers. In other words, the top-line unemployment figure does not describe the situation accurately.
Inflation will be between 1.5 - 1.7%. The core inflation rate (without gas or food prices) will be between 1.5-1.6%, well below the Fed's 2% target. It's projected to rise to between 1.6 - 2.0% in 2015, and between 1.8 - 2.0% in 2015. (Source: FOMC meeting, June 18 2014)
Interest Rate Outlook
The Federal Reserve clearly gives forward guidance for its monetary policy which guides interest rates. It's told the business community and consumers that the Fed funds rate will remain at near-zero until mid-2015.This controls short term interest rates, and assures us that variable and other short-term rates will remain at record-low levels.
The FOMC is tapering quantitative easing through 2014. This means there will be less demand for Treasuries. That affects fixed-interest and longer-term rates, which follow the 10-year Treasury yield. This yield will probably rise to 3% as the Fed continues to reduce its purchases.
However, the Treasury yield also depends on demand for the dollar -- if demand is strong, yields will drop,and vice-versa. As the global economy improves, demand for this ultra-safe investment will decline as investors search for greater return. As a result, expect long-term and fixed interest rates to rise in 2014 and beyond.
The U.S. Energy Information Administration (EIA) outlook is from 2011-2040. It predicts average annual GDP growth rate to be 2.5%, with unemployment falling to 5.9%, and the Fed funds rate rising to 3.4%. U.S. crude oil production will increase by 234,000 barrels per day (bpd) through 2019, when it reaches 7.5 million bpd. This is because of increased onshore oil production from shale oil. Natural gas production also increases, allowing the industrial and electric power sectors to lower costs over the next 15 years. Industries, especially chemical production, increases natural gas use by 16%, from 6.8 trillion cubic feet per year in 2011 to 7.8 trillion cubic feet per year in 2025. Electricity generation increases its reliance on renewables from 13% in 2011 to 16% in 2040.
At the same time, regulations increase new vehicle fuel economy from 32.6 miles per gallon (mpg) in 2011 to 47.3 mpg in 2025. As a result of improved energy efficiency of energy use and a shift away from the most carbon-intensive fuels, U.S. energy-related CO2 emissions are more than 5% below their 2005 level through 2040. (EIA Short-term Energy Outlook; 2013 Annual Energy Outlook)
The Bureau of Labor Statistics publishes an outlook for U.S. employment each decade. It goes into great detail about each industry and occupation. Overall, the BLS expects total employment to increase by 20.5 million jobs from 2010-2020. While 88% of all occupations will experience growth, the fastest growth will occur in health care, personal care and social assistance, and construction. Furthermore, jobs requiring a master’s degree will grow the fastest, while those that only need a high school diploma will grow the slowest. (Source: BLS Occupational Outlook Summary)
The BLS assumes that the economy will fully recover from the recession by 2020, and that the labor force will return to full employment, or an unemployment rate of 4-5%. The biggest growth (5.7 million jobs) will occur in healthcare and other forms of social assistance as the American population ages.
The next largest increase (2.1 million jobs) will occur in professional and technical occupations. Most of this is in computer systems design, especially mobile technologies, and management, scientific, and technical consulting. Businesses will need advice on planning and logistics, implementing new technologies, and complying with workplace safety, environmental, and employment regulations.
Other large increases will occur in education (1.8 million jobs), retail (1.7 million jobs) and hotel/restaurants (1 million jobs). Another area is miscellaneous services (1.6 million jobs). This includes human resources, seasonal and temporary workers, and waste collection.
More 2014 Forecasts
- The Stock Market Will Correct -- The Dow rose 24% in 2013. Nothing goes in a straight line, so expect a pullback or even a 10% correction in 2014. When will it happen? I expect sometime in the first quarter, possibly even January. That's because investors could be spooked if Congress doesn't raise the debt ceiling or doesn't approve three major trade deals.
- The Housing Market Will Continue to Strengthen -- Home prices will continue to rise, but at a much slower rate. That's because interest rates will creep up, lowering demand. Homebuilders are on tap to add many more new structures, increasing supply. If you're thinking of selling your home or moving, just go ahead and make your decision. Don't wait for the market to improve, it isn't going to get much better...or much worse.
- The Fed Will Continue to Taper -- The Fed will keep cutting back on its purchases of Treasury notes, and may even end Quantitative Easing by the 2015. This means interest rates will slowly creep up, but that's actually healthy. To see why, read How the Yield Curve Predicts the Future.
- Gas Prices Will Creep Up a Bit in the Spring -- High gas prices usually occur every spring. Last year it happened in January, the year before in February, and in March in prior years. However, they usually drop by April. This year, the U.S. is producing so much shale oil, it's unlikely we'll see much more than a slight uptick.
How It Affects You
This will be a prosperous year, as we can finally say goodbye to the effects of the financial crisis. However, we've seen a bit of irrational exuberance in the stock market this year. Although we aren't there yet, that usually signals the peak of the business cycle. However, another recession is probably 2-3 years out. That's because this recovery has been so slow that it will take longer to reach the peak.
Therefore, best thing to do this year is to stay relentlessly focused on your own financial well-being. Continue to improve your skills and chart a clear course for your career. If you're invested in the stock market, stay alert for a pull-back, but get reinvested at the lows because the year will end better. As the economy improves, commodity prices, including gold, oil and even coffee, will stay at record lows. That should mean lower prices for food. All in all, a good time to reduce debt, build up your savings and increase your wealth. Article updated June 21, 2014