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Kuehl: U.S. a ‘Moderate Growth Country’

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Much of the economy’s growth in 2015 depends on how well the country springs back from the difficult winter and what consumers do with their extra gas money. “Traditionally spring is pretty strong after a crappy winter, so we expect a spike in spending, especially in the Northeast,” said economist Chris Kuehl, managing director of Armada Corporate Intelligence, in his remarks Feb. 26 at FMA’s annual meeting in Orlando.

Kuehl predicts 2015 will start out strong, but moderate as time progresses. The economy’s dependence on consumer spending makes it difficult to predict. “Perception is everything. Eighty percent of GDP is based on consumer attitudes—and consumer sentiment is fickle,” he said.

Low gas prices at the pump should leave more money in consumers’ pockets, but the decline came too late to help retailers much last fall. In fact, consumers saved more money in December than in November, which is very unusual, Kuehl said. “The conjecture is people didn’t realize they had more money until the end of the month. The holiday shopping season was not helped much by the drop in gas prices, which occurred too late in December. The holiday for retailers was adequate, but nothing to write home about.”

Much of the uncertainty in the economy can be attributed to the volatile energy sector, where oil prices are slowly rebounding from lows under $50 a barrel. “All of a sudden we are one of the world’s leading oil producers. We finally start producing our own oil and the bottom falls out of the market,” Kuehl observed.

He pointed to three theories about what is likely to happen in the oil market over time:
* U.S. output will decline as a result of the low oil prices, which make drilling unprofitable, and OPEC will return to prominence.

* The world has reached peak demand as a result of greater fuel efficiency and less reckless use of fossil fuels, reducing the need to develop new production.

* Or the availability of cheap fuel will accelerate consumption, and thus production, and the epicenter of oil will shift away from OPEC to the Americas.

Kuehl does not subscribe to one theory over another, but noted that as recently as 2006 the U.S. imported 65 percent of all the crude it used. Today, the country is becoming an oil exporter. “As a good gets cheap, we have a tendency to use more of it. I don’t think it will happen overnight, but over time we may start to notice less pressure to conserve,” he said.

Moving to his forecast for the economy, Kuehl predicted interest rates will not rise until late 2015 or even later. There is no factor driving the Fed to act on interest rates. When it does, the rise will be slow unless inflation kicks in, GDP accelerates above 3.5 percent, or the global recovery catches up to the U.S., he said.

Raising rates would make the dollar even stronger relative to other currencies, further weakening U.S. exports and attracting foreign imports. “If you are competing against imported steel, [a rate change] would give them another opportunity to put things on sale,” Kuehl said.

Don’t expect improvement in other world economies to help much in 2015, he continued. Conditions in Europe promise to remain weak, while growth in China and other parts of Asia has slowed.

In the U.S., most major economic indicators appear positive. The PMI, industrial production, capacity utilization and durable goods numbers are all respectable. The job market continues to improve, which is reflected in higher wage rates. One contrary sign is a tightening in trade credit, which is cause for concern, he said. “We have not seen this kind of credit crunch since the recession. It is something I am a little worried about.”

In general, Kuehl’s forecast is a bit bearish due to the unpredictability of consumer demand, the drag of the difficult winter, sagging exports from the currency effects and weakness overseas, and the unlikely-but-possible threat of some cataclysmic event. He expects GDP to grow at a modest 2.5 to 3.0 percent this year. “GDP has been in that range for the last 15 years. It is unusual for us to be really low or really high. We have become a moderate growth country.”