Phil Castle, The Business Times
Economic growth should continue through 2015 in the United States with rising consumer spending and corporate profits and falling unemployment rates.
But a strong dollar and slumping oil prices likely will bring both gains and pains in the coming year, said Doug May, regional manager for Avant-Garde Advisors in Grand Junction.
May detailed a mostly upbeat forecast during the latest of his twice-yearly economic update presentations. “It’s optimistic,” he said.
The outlook is especially encouraging for the economy, May said, as the U.S. moves from the middle into the later stages of the business cycle.
He projected annual growth of 3 percent in gross domestic product, the broad measure of goods and services produced in the country. Increases in consumer spending and business investments will more than offset declines in government spending and exports.
Increased consumer spending will reflect what May expects will be a healthier labor market and a decline in the U.S. unemployment rate to 5 percent. The tightening labor market likely will drive wages higher toward the end of the year.
May bases his forecast in part on a proprietary leading economic index comprised of 10 indicators. The latest reading signals expansionary conditions, he said, with strength in bank lending, corporate profits, manufacturing capacity, retail sales, semiconductor sales and small business optimism. There’s weakness, though, in global shipping activity, the money supply and new factory orders. Oil and natural gas drilling activity likely will slow as well as a result of lower energy prices.
The increasing strength of the U.S. dollar against foreign currencies will benefit consumers in lower prices for exported goods. The cost of international travel will decline as well, May said.
At the same time, though, a strong dollar makes it more difficult for U.S. companies to compete in foreign markets and could hamper international travel to the U.S., he said.
Increased exports to the U.S. from such areas as China and Europe could bolster the economies there, and make investments in international firms more attractive, he added.
Slumping oil prices similarly will offer benefits and disadvantages, May said.
Consumers who spend less at the pump at the gasoline stations outside stores will have more to spend inside the stores and likely will do so, May said. U.S. companies whose operations are significantly affected by energy prices also will fare better.
But at the same time, lower oil prices also will affect energy exploration and production and, in turn, the areas where energy constitutes an economic driver, May said. That includes Colorado. “I don’t think it’s good news for us.”
May said some of the effects of lower oil prices on the energy industry and its employees likely were felt in a more conservative approach to holiday shopping. Earnings for energy companies likely will drop.
The question is how long low oil prices will persist. May said the decrease could be short-lived with prices trending higher toward the end of the year.
May said part of the decrease in oil prices could be attributed to the sales of crude oil by the terrorist group known by the acronym ISIS. The group reportedly has been selling oil on the black market for as low as $40 to $20 a barrel to finance its activities. As efforts intensify to defeat ISIS, discounted black market oil sales could decrease, he said.
Even as the U.S. economy continues to grow in 2015, May expects the stock market to remain flat with the market likely performing better at the beginning of the year than the end.
One indicator could be the relationship between investor sentiment and subsequent market action, May said. Counting the 10 years when average investor sentiment was highest, the average return on the Standard & Poor’s index of 500 stocks was just a tenth of a percent. Average investor sentiment levels in 2014 were the second highest on record, he said.
Still, the market remains reasonably valued, May said, as corporate earnings keep pace with higher prices.
May expects the health care sector to continue to perform well and utilities to fare less well.