December is often a time for reflection on our accomplishments over the past year, which can help us to set our sights, expectations, and strategy for the new year to come. Our forecast for 2014 was largely on point at least directionally, anticipating several key events:
Unemployment edged below 6%.
GDP exceeded 3% in the 3Q 2014 and the United States was a leader in economic growth.
Energy costs and interest rates remained low (very low) through the midterm elections.
Crowdsourcing of capital started to go mainstream.
Home price increases once again made homeowners “paper wealthy,” stimulating consumer spending and thereby spurring economic growth.
“Onshoring” accelerated as U.S. consumer demand for “made in America” goods remained strong.
man looking into spyglass symbolizing business predictions for 2015As we begin 2015, despite low interest rates, low energy costs, and rising but stabilizing housing prices, the U.S. economy might very well begin experiencing a cyclical slowdown. With the Congressional elections behind us, one can expect a series of presidential vetoes as the legislative branch seeks to introduce their agenda for reform. Unresolved debt ceiling and budget conflicts, kicked forward from last year, will continue to create a significant degree of economic, political, regulatory, and capital market volatility in the coming year.
In January, the year 2015 brings a number of “wild cards” to the table, both domestically and worldwide:
The re-engagement of U.S. forces and other countries fighting the ISIL insurgents in Iraq, Syria, and Lebanon will only continue to escalate and expand world terrorism and governance challenges.
Ebola remains a deadly disease that may not be contained just to Africa, requiring other countries to be ready to address the disease both with money and resources as well as address the “fear factor” of their country’s population.
Russia remains the most significant wild card due to declining oil prices, global sanctions, loss of currency value, and political turmoil. Russia has defaulted on debt before and a Russian default or debt downgrade would shake the global economy. (Note: Moody’s recently downgraded Russian debt and the cost to insure Russian debt has doubled in 2014.)
With the election over, U.S. interest rates will rise in 2015 and could significantly slow consumer spending and corporate capital investment.
The United States is not immune to the continued slow recovery in Europe or the economic slowdown in China.
5 Key Business Predictions for 2015
1. Gradual But Consistently Rising Interest Rates
Access to low-cost capital will begin to tighten as interest rates increase over the next year. It is no longer a discussion of when interest rates will rise but rather how much and how fast.
Economic growth accelerated through 2014 due in part to record low interest rates and from homeowners borrowing against the equity in their homes. For the coming year, banks will face increased capital requirements, reducing the availability of debt. Increasing interest rates will slow home refinancings and consequently consumer spending, potentially slowing economic growth. Extremely low energy costs in the short term will partially offset increasing interest rates and temporarily delay the negative effect of rising rates on the U.S. economy.
2. Volatility in Energy Availability and Prices
Last year we predicted that the United States would move closer to being an energy exporter rather than an importer. In mid-summer, the first export of U.S. oil in decades left the country for South Korea. OPEC, fearing increasing U.S. production, met in November and did not cut output, thereby causing a collapse in worldwide oil prices. U.S. drilling permits immediately declined as low prices drove producers to seek to reduce drilling budgets. A boon to gasoline-buying consumers and corporations, low energy prices have a whipsaw effect. Many world economies are dependent upon oil royalty revenues and a decline in oil-based revenues means slow economic growth for many oil-producing countries.
By the middle of 2015, energy prices will partially recover due to decreased U.S. production (producers will bank oil for sale to obtain future higher prices). Opposition to Saudi Arabia’s control of OPEC from cash-strapped OPEC countries such as Iran, Ecuador, Venezuela, and Nigeria as well as from non-OPEC countries such as Mexico and Russia will put pressure on continued high levels of production. Traders will also hedge and purchase oil futures at low prices, forcing prices up.
By midyear, look for significant volatility in oil prices and a significant increase much sooner that many experts predict. (Note: Boone Pickens, an oil industry legend, predicts that prices will be back at 100 dollars a barrel in 12 to 18 months.)
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