Economy Faces Challenges Ahead

Pasadena Star News

By: Cynthia Kurtz

Published: 12/31/2014 

Time to wave good-by to 2014 and start planning for 2015. Reliable crystal balls are hard to come by these days. But even so there are some indications of what to expect in the New Year.

Let’s start with the stock market. While it isn’t the most important indicator of the economy’s direction, higher stock prices can indicate strong earnings estimates for companies. Strong corporate profits correlate with a rise in GDP and job growth. 2014 is ending with a record high stock market and predictions that the trend will continue.

Consumer confidence - the 800 lb. gorilla in the economy - is up. When consumers are concerned about spending money there is a chain reaction that reverberates throughout the economy. Retail sales slump, manufacturing activity slows, hiring stops, and the unemployment rate increases. 

Lower gasoline prices are leaving extra cash in consumers’ pockets and they seem willing and ready to spend it. Predictions are that gas prices may go even lower before stabilizing. Many workers are expecting wage increases in 2015 so confidence and spending should continue.

Unfortunately drought conditions are also expected to continue. Even with a few early winter storms, the levels of the state’s reservoirs and groundwater tables remain alarmingly low. A wet winter might prevent a crisis but water is going to remain scarce and the cost for it will go up. Making capital investments and operating changes now to conserve water will pay off for businesses and consumers in the long run. 

Closely related to water costs are energy costs. With less water, in-state hydro power generation slowed to a trickle this summer. Electric utilities had to purchase power from sources further away and bring it long distances to meet consumer demands. That costs money.

The 2014 summer fires and the closing of the San Onofre Nuclear Generating Station (SONGS) increased transmission costs. Power rate increases lag behind commodity cost increases so residents and businesses alike should expect higher rates in 2015.

Economists are predicting the price of housing will also rise in 2015 but that 30-year mortgage rates will remain low. The housing market has not been able to stabilize as it climbs slowly out of the 2008 crash. 

The wild card for the recovery of the housing market is the Millennials. The U.S. Census reported that 23 year-olds are now the largest population group followed by 24 year-olds and in third place 22 year-olds. The Census Bureau also says that rather than becoming smaller, as one might assume, immigrants tend to be younger so the size of U.S. age groups increase until about the age of 40. That means there will be even more young adults in their mid-20’s in the next few years.

When the majority of Millennials begin to set up their own households, demand for housing will increase dramatically.  With increased demand, developers will step up production.  Manufacturing of furnishings, appliances and other household goods will also increase.  2015 just might be the year that this trend begins.

Overall the U.S. economic recovery will continue with bumps in the road when international incidents send financial shocks through global markets.  But at home we can expect relative economic calm.  The SGV will continue to benefit from this recovery. 

Regardless of how well the economy does, my wish for 2015 is health and happiness for you.