Happy New Year (mostly): six predictions for the economy in 2015

The US economy veered unpredictably in 2014. A polar vortex hampered activity early in the year, but a free fall in gas prices has done the opposite to close it out. With gas prices nearing $2 per gallon in multiple states, consumers are spending less at the pump, giving them more wiggle room to spend in other areas. In general, the US economy is ending the year on a high note: the job market is humming along, the stock market continues to hit new highs, and formerly dull spots in the recovery, including wages and the housing market, are finally showing signs of life.

Will the momentum continue in 2015? In most areas, economists are optimistic that it will. To that end, here are the best guesses from the experts on what the economy will do next year: 

1. GDP growth will top 3 percent.

Ever since the Great Recession, economic growth has been sluggish, stuck in the mid-2 percent range or worse. 2014 could have been the year growth in gross domestic product finally hit 3 percent again, except for one thing: A spate of uncommonly cold winter weather brought the consumer economy to a near screeching halt during the early weeks of the year. Next year? “No polar vortex!” says David Berson, an economist with Nationwide, in a phone interview. “Four of the last five quarters GDP has been 3.5 percent or higher. If we don’t get a polar vortex this year, we will start to see the trend rate pick up to 3 percent or a little above. We’re not seeing it now because that first quarter was so bad it was hiding the growth of the rest of the year.”

US GDP has a lot going for it in 2015. Job growth has been strong, and wages are finally showing signs of life. Gas prices are falling, something that analysts expect to continue well into the first half of next year.

Solid growth in the US will get a helping hand from a slight improvement in the eurozone and monetary stimulus from central banks, including the Bank of Japan (BoJ), the European Central Bank (ECB), and the People’s Bank of China (PBoC), says Nariman Behravesh, an economist with IHS Global Insight. Such actions “will not only support growth, but could also provide the basis for some upside surprises,” Mr. Behravesh writes in an e-mailed report.

All told, he says, the US will continue to outperform the economies of other developed nations in 2015.

2. The bull market will stay bullish.

In August, the current stock market rally became the fourth-longest since the Great Recession without a 20 percent correction. Other than a small October stumble, that trend of slow, steady growth has continued. Barring any major developments, economists expect the same in 2015.  “In terms of both timing and price, it wouldn’t necessarily surprise anyone if we had [a major correction]," says David Joy, chief market strategist for Ameriprise Financial, based in Boston, in a phone interview, “But if you look at the fundamentals, they don’t suggest that we need to have one. Equity values are not excessive.”

He says that if a correction hits this year, some outside catalyst, like a geopolitical event or a supply chain disruption, will likely drive it.

3. Interest rates? Big deal.

Since at least the summer, economy watchers have been preoccupied with the question of when the Federal Reserve will move to raise interest rates.  It’s informed analysis of nearly every piece of data that has been released in the last six months, the worry being that any drastic action could spook the stock market into a correction and have a ripple effect on the rest of the economy.

By design, however, the Fed’s guidance on interest rates has been so careful and deliberate that investors have long been ready for an eventual hike, which almost everyone agrees isn’t coming until at least the summer. “I expect the market reaction to be pretty sanguine, unless conditions change between now and the summer,” Mr. Joy says. “Right now, the Fed has the benefit of an improving labor market without any wage pressure whatsoever. That’s bought them time. If we see a sudden wage increase, then the market may expect rates to rise sooner.”

So far, the stock market has been unfazed. The Federal Reserve released its last statement of the year Dec. 17, removing the closely watched phrase, “for a considerable time” from its guidance on rates – indicating that a hike was closer than before. The markets responded with their best day of 2014, with the Dow closing up 288 points. 

4. Millennials will help the housing market.

Speaking of higher interest rates, how will they impact housing in 2015? Not as much as you might think, Mr. Berson says. “Mortgage rates did pop up a bit last year, but that was without an improvement in the job market. This year the job market is better, and that’s usually a positive sign for housing.

The big thing holding the market back in recent years, he adds, has been a low rate of household formation – young adults getting married or entering domestic partnerships and moving into their own homes. But as older Millennials head toward age 30, that should improve. “Fewer of them will want to live at home or together as roommates,” he says.

Realtor.com, a nationwide database of real estate agents, predicts that new home sales will rise by 25 percent next year, and that Millennials will make up 65 percent of first-time buyers .  

5. Consumers will have more purchasing power.

All of that good mojo for buyers entering the housing market should also translate to the general consumer economy. For much of the recovery, wage increases were failing to keep pace with inflation, but that began to change with last month’s jobs report. In addition, consumer prices took their biggest slide in six years last month, thanks to those low gas prices we mentioned earlier. As the Monitor reported Dec. 17:

“In all, the consumer price index is still up this year, but the pace of inflation is minimal and has been decelerating during the years of economic recovery since 2011. The CPI is up just 1.3 percent over the past 12 months.

That doesn’t mean prices are now poised to fall at grocery stores or hospitals, but it does give millions of consumers a welcome boost: Wages have been rising modestly while prices are generally quiescent. This year looks set to end with the best real pay increases since 2009 – a year when prices were falling and 6 million more Americans were unemployed.”

Most analysts believe the wage momentum should continue well into the New Year, with inflation staying relatively modest.  And a recent AAA report, released Dec. 12, forecast “no end in sight to lower gas prices as crude oil continues to fall sharply.”

6. Unemployment will fall to the low 5 percent range.

Job market gains were strong in 2014, and analysts expect that to continue – albeit a bit more slowly. “ Employment should continue to grow at a solid pace and perhaps above the 241,000 average for this year,” Berson says. “The unemployment rate should continue to decline, although more slowly than in the past few years as the labor force participation rate moves a bit higher.”

For qualified workers, 2015 will be a buyer’s market. Sixty percent of US hiring managers and recruiters expect an uptick in hiring next year, according to a survey from Dice Holdings, a company that runs career services websites for a wide range of industries. Some 42 percent of hiring managers also said it will take longer to fill open positions, because of a dearth of qualified candidates. 

Prospects aren’t rosy for everyone, however. “The long-term unemployment rate is going down much more slowly than the overall unemployment rate,” Ofer Sharone, an employment expert at the Massachusetts Institute of Technology, told Forbes Dec. 17. He’s referring to the 3 million or so US workers that have been off the job for six months or more.