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1100 13th Street NW, Washington, DC 20005 • kiplinger.com • Vol. 91, No. 1

Dear Client:

To help your decisionmaking in 2014… Ten top forecasts for the next 12 months:

1) Moderate growth for the U.S. economy. 2014 OUTLOOK Consumers and businesses will spend more, and the unemployment rate will fall to about 6.5%. For the year, look for GDP growth of 2.6%, following a tepid 1.8% increase for the U.S. in 2013. Europe will grow as well, but only barely. Expect growth of less than 1% for the euro zone... not great, but welcome news for a budding recovery. Germany and the U.K. will see stronger expansion.

Washington, Jan. 3, 2014

ECONOMIC FORECASTS GDP growth Averaging about 2.6% in ’14, up from 1.8% in ’13

Interest rates

NEW

By end ’14, 10-year T-notes at 3.5%; 30-year mortgages, 5%-5.5%

Inflation 1.4% this year; in ’14, rising slightly to 1.8%

Unemployment

NEW

Approaching 6.5% by end ’14

2) You’ll pay a higher rate for a mortgage… as much as 5.5% by next Dec., from around 4.5% Crude oil for a 30-year loan now…as the Federal Reserve Trading from $90 to $95/bbl. tapers the bond buying binge that has kept rates low. through March And mortgages will be harder to obtain Manufacturing growth because of tighter lending restrictions from the CFPB, Continuing to strengthen the Consumer Financial Protection Bureau. on rising auto sales, home building As a result, slower growth for housing. Complete economic outlook at For sales of existing homes, a 4% increase in 2014, kiplinger.com/outlooks following a 9.3% hike last year. Slimmer growth, too, for starts and sales of new homes, but both will still see double-digit increases as builders grow increasingly confident and inventories of new homes remain tight. 3) By this time next year, Obamacare will find itself on sounder footing... even as critics continue to dig in their heels. The number of insured will steadily grow, the bureaucratic messes will be cleaned up, and the number of uninsured will decline. Obamacare will never be universally embraced, but approval of it will climb. First, however, more headaches as people get used to their new coverage. Headlines will focus on the failures: Folks who enrolled in the wrong plans, can’t get prescriptions filled because pharmacies don’t have their information, etc. Enrollment will fall somewhat short of the 7-million goal on March 31. And young, healthy people will shy away, perhaps even in large numbers at first. But success stories will emerge by the next enrollment period this fall. 4) Republicans will keep control of the House but won’t take over the Senate. They’ll come close, though, perhaps ending up just one or two seats short in Nov.’s elections. The results guarantee a divided and deeply partisan government for the rest of Barack Obama’s presidency and set up a bitter 2016 presidential race. The key seats Democrats need to keep the Senate are in La., Mont. and Ga. The GOP needs all three for a shot. The La. job is held by Democrat Mary Landrieu. Mont. will be represented by an as-yet-unknown Democratic appointee if Max Baucus, a retiring Democrat, is confirmed as ambassador to China. Plus the GOP has to win an open seat it holds in Ga., where Democrat Michelle Nunn is making waves. The Kiplinger Letter (ISSN 1528-7130) is published weekly for $117/one year, $199/two years, $263/three years by The Kiplinger Washington Editors, 1100 13th St. NW, Suite 750, Washington, DC 20005-4364. POSTMASTER: Send address changes to The Kiplinger Letter, P.O. Box 3297, Harlan, IA 51593.

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5) Congress will soften the Patriot Act this fall by putting more limits MORE TOP 10 on the government’s powers to collect private information about citizens. The broad national security law will be renewed, but more transparency will be added. President Obama will take his own steps, offering rules for using the phone records of Americans in National Security Agency investigations. He’ll push for more openness on a secret court that oversees surveillance activities by U.S. intelligence agencies, too. Courts will weigh in as well. But in the end, some data will still be collected. 6) Tea party backers may pick up a seat or two in congressional elections. Still, their influence, in Congress and in politics in general, is in decline. One reason: Growing public disenchantment with the tea party after budget fights and the government shutdown, leaving mainstream GOPers less likely to cave to them. Tea partyers are steamed at House Speaker John Boehner but can’t oust him unless they increase their numbers or attract mainstream GOPers to their cause. They’ll battle him on budget and spending matters, for sure. There’s not much to do beyond that if Boehner is willing to count on Democratic votes to move House bills. After a rough start, Boehner can remain speaker for as long as he wants. But don’t be shocked if he gives up the job and his seat after the elections… especially once those results show his party coming up short of a Senate majority. 7) A grand bargain on tax reform and entitlement overhaul won’t happen. It requires too much heavy lifting and political risk for incumbents on the ballot. Congress will approve a new debt ceiling increase with little pushback. Sure, the parties anticipate another battle that puts the U.S. credit rating at risk. But here’s why it won’t happen: Treasury officials can push back the deadline until March or April. By then, with tax revenues rolling in, it can keep paying bills into the summer, when lawmakers are ready to go home and start campaigning. The closer the vote comes to Nov., the better the odds are for a quiet extension. 8) Expect local efforts to block natural gas drilling to intensify this year, especially in Ohio and Colo., where a handful of cities are already challenging regs that give companies wide latitude in choosing where to explore. Maybe in Pa. as well, following a state Supreme Court ruling giving localities the ability to block fracking. The naysayers will be a minority. Many places like the new jobs and revenue. Also in the works: A surge in offshore drilling in the Gulf of Mexico, thanks in part to Mexico amending its constitution to allow private firms to work in the energy sector. Guidelines for drillers, pipeline builders and the like are coming. Many fields in Mexican waters are ripe for rejuvenation once outside companies are allowed to employ drilling know-how that Mexican energy workers don’t have. 9) Set for the next big tech breakthrough? Look no further than your wrist. A new category of smart watches is a good bet to emerge in coming months. Think of it as a merging of Dick Tracy’s wrist radio and Capt. Kirk’s communicator… a wearable device that allows you to store passwords, track data and do other tasks. The watch will catch on first with consumers looking to be among the early users but will quickly find business uses, just as the iPad did when it was introduced. The earliest versions are likely to come from Google, Apple and Microsoft. 10) Iran will drag its feet in deciding whether to shutter its nuclear program. But the situation won’t escalate in 2014. Tehran will take just enough steps to keep prospects of a permanent pullback in play, and the U.S. and other countries will respond by holding off on new economic sanctions. President Obama, especially, is eager for a diplomatic resolution instead of a potentially messy military operation. A speedy dismantling of Iran’s nuclear capabilities isn’t in the cards. That’ll take years...and new religious leaders who embrace economic power. Remember, your subscription includes The Kiplinger Letter online


THE Note this signal of an improving economy: Businesses are adding to stocks. ECONOMY Inventory building accounted for over a third of the big third-quarter jump in GDP growth (to a 4.1% annualized pace), and the upward trend continued in Oct. Though rising inventories can be bad news, indicating slowing sales… This time they’re probably not. Higher railcar loadings through early Dec., plus more sales of cars, light trucks and other goods in Nov., spell rising demand, too. What’s more, businesses pumped up inventories (excluding food and energy items, which are price sensitive) to levels last seen in mid-2012. That was before big cuts in government spending dented their confidence about accelerating economic growth. Look for public corporations to pour less into share buybacks this year. Though a disappointment to stockholders who reap the benefits of fewer shares… That’s good news for economic growth. One study says that every $1 million used by companies to repurchase stock spurs a $440,000 drop in capital spending and a $36,000 decline in research and development, plus it trims the need to hire. So buybacks end up acting as a brake on growth rather than helping to fuel it. As confidence in future demand picks up, buybacks will lose some luster, and businesses are more likely to see expansion as a better place to sock their funds. A number of corporations…ranging from Home Depot to Pfizer to Goldman Sachs… sank an estimated $754 billion into stock buybacks in 2013, over $100 billion less than in 2007. Buybacks hit a record that year before plunging during the recession. FINANCIAL Federal financial regulators face another busy year as a slew of rules SERVICES under the Dodd-Frank financial reform act kick in and as officials struggle to implement several other big, new, controversial regulations. On the docket: Tighter mortgage lending standards…on debt-to-equity ratios, loan servicing and more. Though lenders will continue to squawk, they’ll be forced to toe the line, making it a bit tougher to nail down loans and ruling out some would-be borrowers. Widening the circle of SIFIs...systemically important financial institutions. Expect regulators to pull more big multinationals as well as insurance companies under the designation. They’ll also be pressed to spell out exactly what such firms will be required to do to ensure early diagnosis and treatment of potential problems. Implementing the Volcker rule…barring banks from proprietary trading… And Basel III international banking standards on capital requirements, stress testing, liquidity risk and more. Neither will be put fully in place till 2015, and a series of political skirmishes may yet bring modifications to the Volcker rule. But cybersecurity may prove to be banks’ biggest challenge this year. The number and sophistication of attacks will rise as hackers learn more about banks’ response systems and weakly defended mobile platforms attract interest. Plus hacking will get easier and less expensive, but the cost of identifying, preventing and repelling threats will rise. Though denial-of-service assaults…flooding a site with faux users, sucking up all the bandwidth and rending the site unreachable… will remain the most frequently used tactic, more-treacherous ones will also abound. Information may be stolen or destroyed; bank and client data tampered with; operations disrupted; and fraud committed in increasingly novel, unanticipated ways. AUTO Ahead for automakers in 2014: Tougher competition, as the strong rebound SALES logged in auto sales in recent years begins to moderate. Sales growth rates, which have been around 10% a year since the recession, will slow to about 5% in 2014, forcing automakers to work harder to gain market share and protect profit margins. Consumers will benefit as manufacturers maneuver to win their business by offering new features, better quality, snazzier designs and more financial incentives. Smaller luxury brands, including Volvo, Lincoln and Acura, are struggling to keep up with larger rivals and face particular pressure to roll out improved models to win sales. For instant online access and searchable archives, go to kiplinger.com/start


POT With many Americans favoring the legalization of recreational marijuana… More and more states will OK its sale and use, joining Colo. and Wash. state, which have already done so. This year, voters in Alaska and Ore. will legalize it, while voters in Ariz., Calif., Mass., Maine, Mont. and Nev. are likely to do so in 2016, when proponents of legalizing weed foresee a big pro-pot turnout in those places. As legalization spreads through the states, so will drug education efforts aimed at discouraging kids from smoking pot until they reach the legal age of 21. Colo. and Wash. are both earmarking a portion of the tax on the sale of marijuana to spread the word in schools about the harm it can cause to still-developing minds. Workplace policies aimed at drug use can stay as-is, though legal challenges of policies are sure to increase. Companies receiving federal funds, as well as airlines and others with safety-sensitive jobs, must heed the federal drug-free-workplace law. GAY RIGHTS

The Supreme Court may legalize same-sex marriage as early as 2015. Justices stopped short of that step in a limited ruling last year. Since then, more states have allowed the unions, and more challenges are sure to be filed in the 32 states that ban them. In fact, the high court could decide within days to make Utah the test case that could lead to a broad, precedent-setting ruling. If not Utah, though, another state will become a vehicle, sooner rather than later. The key: Justice Anthony Kennedy. He has voted with the Court’s liberals in several gay rights cases, including last year’s questions about marriage. But he’s also a strong advocate of states’ rights, so his vote can go either way. A close reading of his opinions, however, shows he tends to favor personal rights over the rights of states or other governments when individual rights are at risk. It’s not a given, but odds are good that Kennedy will rule for the marriages.

SPACE China’s recent lunar landing of a rover will light a fire under NASA, prompting the agency’s backers in Congress to restore it to some semblance of its former glory days. Look for lawmakers to ease budget cuts in coming years and even add some funding for NASA’s research into solar flares, planetary sciences and more, bringing new grant money, projects and jobs to many parts of the country. But a space race between the U.S. and China won’t materialize…no encore of the one between the U.S. and the Soviet Union that led to men landing on the moon. U.S. space goals will stay modest, even as China ratchets up its ambitions, including building a space station and probing the far reaches of the solar system. FOR Blending product rentals with free shipping will gain steam this year RENT among a growing number of retailers that entice shoppers to spend money on items, such as designer dresses, they might otherwise not be able to afford to buy. Customers go online to choose clothes, sports gear, electronics, tools, cookware, etc., and use them for as long as they want before returning them. Care to buy an item after renting it? No problem. The concept is catching on among all age groups. Look for delivery firms to expand operations to handle more packages.

Yours very truly,

Jan. 3, 2014

THE KIPLINGER WASHINGTON EDITORS

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