Looking Backward and Forward.

Expert predictions for economic developments during 2014 turned out to be off-target in several important areas.[1] Try, try again. What do they say 2015 will look like?

The rest of the world had a lousy year in 2014, so the American economy looked good in comparison. Unemployment fell from7 percent at the end of 2013 to 5.8 percent at the end of 2014.[2] US employers added 2.7 million jobs during the year. New jobs are running near the highest point since 2001. However, there are still about 2 million fewer workers with full-time jobs.[3] So, it will be a while before there is much upward pressure on wages.[4] As a result, the American stock market had a much better year in 2014[5] than did foreign markets.[6]

Why did the American economy do better in 2014 than most other places? A combination of factors were at work, but one thing was more important than all other things. During the second half of 2014 the price of oil dropped by fifty percent. Partly, this reflected a long-developing increase in American production of oil and gas. Partly, it reflected a decision by the Gulf countries not to reduce their own production in response to falling prices.

Low oil prices should encourage world economic growth in 2015. Low energy prices also are a powerful reason to expect low inflation for a long time; expectations of low inflation may add to this dynamic.[7] Low inflation for a long time means that the Fed will not be under heavy pressure to raise interest rates.

Long-term interest rates have fallen[8] in spite of a strengthening American economy and the end of “quantitative easing.” The falling cost of borrowing will lead to lower rates for mortgages and for borrowing by business. These too should stimulate the American economy.

So, what’s the down-side of all this good news? First, countries that depend on oil for their export earnings (not just Middle Eastern countries, but also Russia and Venezuela) are going to be pinched.

Second, the Fed’s ending of quantitative easing and its expressed willingness to raise interest rates in the future have combined with economic stagnation elsewhere to raise the value of the dollar against other currencies.[9] The dollar is so central to the world economy that its rising value is likely to slow growth elsewhere.

Third, the Asian economies started to slow down in 2014. There is a certain contradiction there. China, Indonesia, and India all tightened on the money supply to rein-in the development of bubbles, while Japan has been trying to stimulate its economy after a long period of stagnation.

The point here is that we are still walking on a knife’s edge. The Europeans are pursuing a fool-hardy policy that will prolong stagnation. China is trying to walk-back some of its heady growth. The US recovery remains vulnerable to unexpected problems at home and abroad. .

[1] Neil Irwin, “Market Trends of 2014: What They Mean for 2015,” NYT, 1 January 2015.

[2] Economists regard 5.2-5.5 percent unemployment as the normal “full employment” rate. You may guffaw, but you haven’t met my brother-in-law. Hire him? HA!

[3] Even that disguises the situation. About seven million people have part-time jobs, but would prefer full-time jobs.

[4] “The Year in Review,” WSJ, 31 December 2014.

[5] The S&P rose 30 percent in 2013 and 11.4 percent in 2014.

[6] However, stock prices are rising faster than corporate profits, so a correction is likely.

[7] At the start of 2014 inflation was running at 2.65 percent per year; at the start of 2015 it is down to 2.14 percent per year.

[8] Interest on 30-year Treasury notes has fallen from 3 percent in late 2013 to 2.8 percent in late 2014.

[9] The euro lost 12 percent against the dollar and yen lost 14 percent.

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