Financial-Watch.com’s Economic Predictions for the Second Half of 2005
Economic news during the first half of 2005 has been fairly dull. Trends established during the latter half of 2004 continue to persist throughout the world’s largest economies and financial markets. Europe continues to fail to stimulate their domestic economies, China’s export and infrastructure booms continue to provide a catalyst for growth in Asia, and the United States continues to grow at a moderate pace. Persistently high oil prices dominated economic news during the first half of the year as oil speculators took advantage of refinery constraints and concerns about shortage of oil later in the year. Financial Watch believes the second half of the year will test the status quo that currently exists throughout the world’s largest economies. The predictions here provide a basis of what Financial Watch expects during the second half of 2005.
1) Housing Bubble Begins to Show Signs of Vulnerability. The Federal Reserve will continue to push short-term interest rates higher, but unlike the first half of this year the Fed will begin to have an impact on long-term rates. Boston and large parts of California appear to be the most vulnerable to a housing crash. We believe rapid price appreciation will come to an end this year and the most vulnerable markets will see early signs of price depreciation.
2) Oil Prices Retreat. Oil speculators are the primary reason behind present oil prices. Growth in the United States will probably lower than most economists are currently predicting. We expect prices to fall to the $50-55 range, as fears of a potential second half shortage of oil do not come true.
3) Federal Reserve Pauses Interest Rate Hikes. Presently Inflation and economic growth in the United States is near the level that the Federal Reserve wants to see. The absence of rising oil prices during the second half of this year should return inflation to the Fed’s desired 2% level. Labor markets continue to hold moderate slack and workforce productivity continues to grow at above historical rates. Financial Watch believes the Federal Reserve’s focus will return to reaccelerating growth later in the year. Short-term interest rates should peak at 3.75-4.25%.
4) U.S. Stock Markets Rally. Financial Watch does not expect a return to the days of the 1990’s yet, but stocks should move moderately higher during the second half of 2005. Investor’s focus around geopolitical and economic concerns has put news of strong profit growth on the backburner. Currently the S&P index is valued at 16x earnings, which is the lowest it has been in about a decade. Continued profit growth this year will make stock values tough to ignore.
5) Job Growth Remains Moderate. Financial Watch believes employment growth during the second half of the year will just exceed the normal job creation needed to absorb new entrants into the workforce. However, some signs of a tightening labor market will emerge for professional workers. Almost all of the job growth during the present economic expansion has occurred in the service sector. This means highly skilled workers will see their bargaining power increase with employers while lower skilled workers struggle to find work.
6) China Slows Down. China’ reliance on U.S. consumers to fund large parts of its rapid growth will hurt growth as the U.S. economy slows down. Financial Watch believes the yuan will decline against the U.S. dollar during the later half of this year.