Friday, October 09, 2015

Q3 Review: Ten Economic Questions for 2015

by Bill McBride on 10/09/2015 09:15:00 AM

At the end of each year, I post Ten Economic Questions for the coming year. I followed up with a brief post on each question. The goal was to provide an overview of what I expected in 2015 (I don't have a crystal ball, but I think it helps to outline what I think will happen - and understand - and change my mind, when the outlook is wrong).

By request, here is a quick Q3 review. I've linked to my posts from the beginning of the year, with a brief excerpt and a few comments:

10) Question #10 for 2015: How much will housing inventory increase in 2015?

Right now my guess is active inventory will increase further in 2015 (inventory will decline seasonally in December and January, but I expect to see inventory up again year-over-year in 2015). I expect active inventory to move closer to 6 months supply this summer.
According to the August NAR report on existing home sales, inventory was down 1.7% year-over-year in August, and the months-of-supply was at 5.2 months.  I still expect inventory to increase in 2015, but it could be close.

9) Question #9 for 2015: What will happen with house prices in 2015?
In 2015, inventories will probably remain low, but I expect inventories to continue to increase on a year-over-year basis. Low inventories, and a better economy (with more consumer confidence) suggests further price increases in 2015. I expect we will see prices up mid single digits (percentage) in 2015 as measured by these house price indexes.
If is still early - house price data is released with a lag - but the Case Shiller data for July showed prices up 4.7% year-over-year. The year-over-year change seems to be moving mostly sideways recently in the mid single digits.

8) Question #8 for 2015: How much will Residential Investment increase?
My guess is growth of around 8% to 12% for new home sales, and about the same percentage growth for housing starts. Also I think the mix between multi-family and single family starts might shift a little more towards single family in 2015.
Through August, even with a weak start to the year, starts were up 11.3% year-over-year compared to the same period in 2014.   New home sales were up 24% year-over-year through August - better than expected, but the comparisons will be more difficult going forward.   So far this is a better than expected.

7) Question #7 for 2015: What about oil prices in 2015?
It is impossible to predict an international supply disruption - if a significant disruption happens, then prices will obviously move higher. Continued weakness in Europe and China does seem likely - and I expect the frackers to slow down with exploration and drilling, but to continue to produce at most existing wells at current prices (WTI at $55 per barrel). This suggests in the short run (2015) that prices will stay well below $100 per barrel (perhaps in the $50 to $75 range) - and that is a positive for the US economy.
WTI futures are close to $50 per barrel.

6) Question #6 for 2015: Will real wages increase in 2015?
As the labor market tightens, we should start seeing some wage pressure as companies have to compete more for employees. Whether real wages start to pickup in 2015 - or not until 2016 or later - is a key question. I expect to see some increase in both real and nominal wage increases this year. I doubt we will see a significant pickup, but maybe another 0.5 percentage points for both, year-over-year.
Through September, nominal hourly wages were up 2.2 year-over-year .  I still expect a little more pick up over the next three months.

Note: I was more pessimistic than most on wages, and that was about right.

5) Question #5 for 2015: Will the Fed raise rates in 2015? If so, when?
The FOMC will not want to immediately reverse course, so the might wait a little longer than expected. Right now my guess is the first rate hike will happen at either the June, July or September meetings. 
June and September didn't happen.  It could even be late this year, or even next year.

4) Question #4 for 2015: Will too much inflation be a concern in 2015?
Due to the slack in the labor market (elevated unemployment rate, part time workers for economic reasons), and even with some real wage growth in 2015, I expect these measures of inflation will stay mostly at or below the Fed's target in 2015. If the unemployment rate continues to decline - and wage growth picks up - maybe inflation will be an issue in 2016.

So currently I think core inflation (year-over-year) will increase in 2015, but too much inflation will not be a serious concern this year.
Inflation was still low through August.

3) Question #3 for 2015: What will the unemployment rate be in December 2015?
Depending on the estimate for the participation rate and job growth (next question), it appears the unemployment rate will decline to close to 5% by December 2015. My guess is based on the participation rate staying relatively steady in 2015 - before declining again over the next decade. If the participation rate increases a little, then I'd expect unemployment in the low-to-mid 5% range.
The participation rate has mostly moved sideways this year, and the unemployment rate was 5.1% in September.  This is on track for close to 5% in December.

2) Question #2 for 2015: How many payroll jobs will be added in 2015?
Energy related construction hiring will decline in 2015, but I expect other areas of construction to be solid.

As I mentioned above, in addition to layoffs in the energy sector, exporters will have a difficult year - and more companies will have difficulty finding qualified candidates. Even with the overall boost from lower oil prices - and some additional public hiring, I expect total jobs added to be lower in 2015 than in 2014.

So my forecast is for gains of about 200,000 to 225,000 payroll jobs per month in 2015. Lower than 2014, but another solid year for employment gains given current demographics.
Through September 2015, the economy has added 1,779,000 jobs, or 198,000 per month.  I still expect employment gains to average 200,000 to 225,000 per month in 2015 (lower than 2014, but still solid).

1) Question #1 for 2015: How much will the economy grow in 2015?
Lower gasoline prices suggest an increase in personal consumption expenditures (PCE) excluding gasoline. And it seems likely PCE growth will be above 3% in 2015. Add in some more business investment, the ongoing housing recovery, some further increase in state and local government spending, and 2015 should be the best year of the recovery with GDP growth at or above 3%.
Once again the first quarter was disappointing due to the weather, cutbacks in the oil sector, the West Coast port slowdown and the strong dollar, but there was some bounce back in Q2.  It looks like GDP will be in the 2s again this year.  Based on the August Personal Income and Outlays report, PCE growth will probably be at or above 3% this year.

Overall, so far, 2015 is unfolding about as expected.