Ask five economists what they expect for 2015 and you’re likely to get scores of answers. Don’t fret: We’ve narrowed it down to five pivotal issues that will decide just how strong the U.S. economy grows this year.
1. Interest rates
Sometime this year the Fed is likely to raise rates, which will ripple through all sorts of lending.
By the middle of the year, “we expect the unemployment rate will be closing in on 5.5 percent and the inflation rate will be between 1.5 percent and 1.75 percent but on the rise,” said Chris Varvares, senior managing director of Macroeconomic Advisers in St. Louis.
The Fed meets eight times a year, and the most likely time frame for a rate hike is its fourth meeting, set for June, Varvares said, though it could raise rates by a quarter of a percentage point in any or all of the four meetings that will come after. The pace could become faster in 2016. Since long-term loans in part take their cue from this Fed rate, it will become more expensive to borrow to buy a home or car. That might slow economic growth.
“The expansion has seemed to be so tentative, even fragile, that you have to be at least a little concerned about what the response will be to rising rates,” said Varvares. “If the rise in rates were to slow the increase in home prices or knock down the stock market, then it would be a negative for consumer spending. And that’s pretty much the foundation of economic growth.”
2. Oil prices
The drop in oil prices has been akin to a massive and welcome tax break for consumers. The AAA Motor Club estimates Americans spent $14 billion less on fuel last year than they did in 2013.
“It would not be surprising for U.S. consumers to save $50-$75 billion on gasoline in 2015 if prices remain low,” said Michael Green, a AAA spokesman.
But there are risks for the economy in the plummeting prices. For one, energy companies are almost certain to cut back their drilling plans, with impacts on hiring and equipment coming quickly.
“I fear the recent plunge in oil prices will prove most damaging to the economy in the near-term as capital spending budgets are scaled back,” said Mark Vitner, a senior economist at Wells Fargo Securities in Charlotte, N.C. “The benefits from lower gasoline prices will take longer to show up.”
That will have a negative effect on the nation’s gross domestic product, he suggested.
That’s because the five largest energy-producing states – Texas, North Dakota, Oklahoma, New Mexico and Colorado – accounted for about 25 percent of the growth in GDP last year. Their outsized contributions to growth will slow; the rise in consumer spending from lower gasoline prices will offset some of that but not all.
“We may see overall growth slow in ways that are still largely unanticipated,” Vitner said. “The energy boom was so big that it carried over into all facets of the economy.”
The U.S. economy is firing again on most cylinders – except housing.
The 5.12 million home sales reported by the National Association of Realtors in November were 3.8 percent below a year earlier, and tight credit makes it difficult for many Americans to get mortgages.
“That’s one of the things that have held back the recovery so far,” said Gus Faucher, senior economist at Pittsburgh-based PNC Financial Services.
Faucher anticipates a gradual increase in the number of single-family home “starts,” signaling an intent to build a new house, in 2015, to about 725,000 for the year, up from the 646,000 starts that had been recorded for 2014 through October (home-building slows sharply in November and December).
“I don’t think we’re going to get a boom in homebuilding,” he said. “But certainly there is room for gradual improvement.”
4. Household formation
One of the aberrations in the recovery is the unusually low rate of household formation. That’s a fancy way of referring to people moving in together, as couples or roommates, and forming new households. After the Great Recession, many young people remained living in their parents’ homes or crowded into apartments together.
“I expect household formation to substantively pick up in 2015 as millennials break away from their parents and strike out on their own,” said Mark Zandi, chief economist for Moody’s Analytics in West Chester, Pa.
An increase in household formations is associated with greater economic activity, especially home sales and apartment rentals. It also implies rising incomes.
“I think that is the single most important development for 2015, that we will finally see acceleration in wage growth. Workers will get real (pay) increases,” Zandi said.
5. Global events
Events in faraway places matter, but they’re unlikely to derail the U.S. recovery. That’s because exports account for only 13 percent of the economy. In fact, slower growth abroad may, in a perverse way, benefit the U.S. economy.
“Yes, it’s a vulnerability, but a limited vulnerability,” said Nariman Behravesh, the chief economist for IHS Global Insight in Cambridge, Mass. “Weakness in the rest of the world can be good news for the U.S. It could lower commodity prices even further, helping to keep inflation and interest rates low.”
While the impact on the U.S. economy is limited, economic deterioration across the globe might be troublesome especially for companies with global operations, such as General Electric, Chrysler or Caterpillar.
“We are worried about growth in Europe, Japan and China,” said Behravesh. “China is a worry. We’re now saying only 6.5 percent growth in China. Could it be lower than that? I think entirely it could.”