Welcome to the CEO's monthly economic newsletter. The newsletter provides a basic narrative overview of recently published economic indicators for your reading pleasure. You should not rely on this information when making investment decisions, but rather seek professional advice from qualified investment advisors.
What do fortune tellers and economists have in common? They both tend to miss their forecasts for the future. Here are a few examples of where economists fell short of their year-end 2014 forecast:
1. They projected unemployment to be at 6.3%; actual was 5.8%
2. Crude Oil would be $95 per barrel; actual was $53 per barrel
3. Ten-year Treasuries would be 3.5%; actual was 2.2%
4. Annual change in inflation would be 1.9%; actual was 1.3%
Regardless of these missed targets, our US economy has picked up some very good momentum during the last three quarters of 2014. The decline in gasoline prices looks to be with us for much of 2015, which should help economic growth for most of this year. The US dollar has been gaining strength against most foreign currencies in recent months; however, will ultimately cause foreign demand for our goods and services to decline, but not until later in 2015. We will want to watch the Institute for Supply Management Index (ISM) for Manufacturing during the year, as an indicator of economic decline. The tipping point is when the Index falls below 50, although it was a very healthy 55.5 in December.
Even though the unemployment rate has been favorably affected by the decline in the labor pool, people are beginning to re-enter the work force. For the first time in more than five years, high-wage job growth for 2014 outpaced low-wage job growth. People had been reluctant to leave an existing job for a higher paying job; however, that is changing, paving the way for others on the sidelines to enter the labor markets. The trend is expected to continue into 2015, resulting in the unemployment rate dropping to near 5% by year-end 2015, according to several economists.
Housing has been doing well, as prices of existing homes will likely finish last year with an increase in values of near 6%. Zillow, one of the better known companies that follow home values believes prices for 2015 will increase by 2.4%, although the Seattle market is expected to approach 4.5% this year. Home sales activity may begin to pick up again, as residential loan rates for 15-year and 30-year fixed rate mortgages were around 3.0% and 3.6% Annual Percentage Yield respectively at year-end 2014.
Inflation seems to be well in-hand at present. On a year-over-year basis the Consumer Price Index (CPI) is up 1.4%. It will not be a surprise to see this number go to less than zero for at least part of 2015, and then move back up as oil prices rebound. Eventually inflation will move closer to the Federal Reserve’s long-term inflation target of 2.0%, but probably not until sometime in 2016, or even as late as 2017.
The Federal Open market Committee (FOMC) headed by Chair, Janet Yellen, has been fairly outspoken about their desire to increase short-term interest rates this year. The general consensus is for overnight interest rates to gradually climb from .25% to 1.0% by year-end 2015, and to continue increasing in 2016 to 2.5%. Essentially they are putting the bullets back in their gun in preparation for the next economic cycle. Longer-term interest rates are not expected to climb as much, since the global economy is continuing to struggle, particularly Europe.
Dennis A. Long
President & Chief Executive Officer
Pacific Financial Corporation
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