Obstacles and Opportunities Abound in 2015
Oceanside, CA - Happy New Year to all of our loyal readers! In our December column, we predicted that plunging energy prices and rising employment trends could result in a much stronger close to 2014 in GDP growth than the consensus forecast of 2% to 2.7%. “That appears to be happening, as the November jobs report was superb, and GDP for the Third Quarter was revised up to a robust 3.9% gain,” said Frank Chow, chief economist for Trade Show Executive Media Group. “However, one month/quarter does not make a trend.”
To identify what we can reasonably anticipate for 2015, Chow summarized the major economic trends that most economists believe will carry over from 2014, prioritized by likely occurrence:
1. Super-low oil prices.
2. Strengthening U.S. jobs and wage growth.
3. Struggling economies in Europe, China, Russia, and Japan.
4. Steady U.S. GDP growth.
5. Solid U.S. corporate profits.
6. Challenges to the housing industry.
7. Cautious consumer and business spending.
“We can expect all of these trends to prevail through the First Quarter of 2015 and probably the Second Quarter,” said Chow. “Whether they continue beyond that depends on how decision-makers react to important developments expected to occur in 2015.”
Foremost is the Federal Reserve’s (Fed) decision on when to raise interest rates. Most economists predict higher rates by the start of the Third Quarter. “How this will impact the economy depends on the strength of the U.S. economy to weather the Fed’s policy change and the reaction of investors worldwide,” Chow said.
The timing is precarious because labor markets have been trending modestly higher since the First Quarter of 2014, but took a surprising jump in November as job growth rose by a whopping 381,000. In addition, average hourly earnings for non-salary workers was double the anticipated 0.2% increase. Chow cautioned that the wage gain could just be catch-up from prior weak months. “However, the breadth of the Labor Department report was impressive: nearly 70% of industries added employees, the highest in almost 17 years,” Chow pointed out. “If this continues into 2015, the Fed may hike interest rates even sooner.”
In January, a new Congress will convene with both houses controlled by Republicans. Whether the President and Congress will be more cooperative remains to be seen. However, most analysts believe the President will continue to bypass Congress with executive orders to achieve his policy objectives.
Moreover, the administration will take more regulatory actions to achieve its goals. For example, by the end of February, the Administration expects to publish new rules on when an employer can exempt a worker from overtime pay. President Obama says the current threshold of $455 per week (nearly $24,000) has been adjusted only twice for inflation in the last 40 years and is below the poverty level for a family of four. To account for inflation, the threshold would have to rise to about $980 per week. Thus employees with salaries of $52,000 or less will be entitled to overtime pay without regard to their job duties. “This regulatory change could affect an estimated 3.5 million salaried employees and will have a direct impact on the trade show industry,” Chow pointed out. “Associations and corporations may be more restrictive about who attends a meeting, while exhibitors and show managers will need to make adjustments to compensate for the increased labor costs.” Expect to see more uncertainty from business leaders, Chow advised.
Next will be OPEC’s decision on whether to change its resistance to cut oil production in 2015. Many analysts believe OPEC is attempting to stall the phenomenal growth in U.S. shale production to protect market share. “So far, it’s working as American firms are already shutting down rigs and curtailing expansion plans,” Chow pointed out. Oil hit a high of $145 a barrel in July 2008 and is now down almost 60% with crude oil dipping to $58 in mid-December. Christine Lagarde, managing director of the International Monetary Fund, estimates a 30% drop in oil prices should enhance growth in advanced economies by 0.8%.
Without OPEC intervention, prices are likely to fall further in 2015 with peak oversupply coming in the Second Quarter, according to Morgan Stanley analysts. Meanwhile consumers and business will experience the equivalent of a huge tax cut, especially the travel, hospitality, and exhibition industries. Further price declines will be a huge boon to the stagnant global economy.
In Europe, the European Central Bank (ECB), headed by Mario Draghi, must decide on whether to expand efforts to revive the Eurozone’s flailing economy. Draghi expressed worries that falling oil prices may dampen efforts to attain ECB’s 2% inflation target. At the same time, expectations for future inflation have also been falling in most of the world’s leading economies, including the U.S., Japan and China. China's consumer inflation fell to a five-year low of 1.4% in November. Inflation in Japan has fallen the last two quarters. “How these countries and OPEC wrestle with disinflation/deflation will help determine the outcome of the global economy in 2015,” Chow said.
The U.S. will face other risks that may derail or more likely place a cap on its current promising course:
- Battles over Obamacare, immigration reform, and excessive regulations will heat up when the new Congress takes over in January.
- Delayed healthcare penalties and higher premiums will be imposed in 2015 on businesses with 100 employees or more; those with less than 100 workers must comply by 2016.
- Structural employment deficiencies still exist: declining labor force participation, rising part-time employment, and low wages.
- Soaring income inequalities for majority of Americans may foster more social protests.
- Geopolitical unrest in Ukraine, the Middle East and Asia.
“In some ways, this year feels a lot like the past few years when the economy was gathering steam and hopes were high at the start of the year, only to fizzle out due to the Arab Spring or weather-related disasters,” said Chow. “However, hope springs eternal.” Chow believes this is the strongest job market since before the Great Recession and the current environment bodes well for trade show growth in 2015.
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