Five Economic Game Changers To Watch In 2015

 

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Abby McCloskey

As 2014 winds to a close, I’m reminded of how much can change in 12 months. The year began with an economic contraction and ended with growth roaring at 5%. Oil prices fell from over $100 a barrel to $56 a barrel, putting an extra $108 billion into consumers’ pockets. The unemployment rate dropped from 6.6% to 5.8% as approximately one million Americans found jobs or gave up looking for work.

The New Year will bring even more change, for good or for ill. From interest rates to the new Republican majority, here are five things that could significantly alter the U.S. economy in 2015:

1. Interest Rate Increase

The Federal Reserve is widely expected to increase interest rates in 2015 after six years of keeping them near zero following the financial crisis. This would mark a needed return to more normal monetary policy, but the transition could be rocky. The stock market could take a hit as rates rise. The market has proven very sensitive to Fed policy, as evidenced by its run-up last week following the FOMC’s announcement that they would be “patient” raising rates. Additionally, consumers may borrow less as loans become more expensive, putting pressure on the housing and auto industries.

2. Oil Shock

Oil prices are likely to continue to fall amid weak demand and increased American oil production. While the drop in oil prices is bruising the energy industry, it functions as a positive shock to the economy. Consumers, spending less on gas, have more money to put towards other expenditures. This could spur economic growth to higher than expected levels, since consumption comprises nearly 70% of GDP.

3. Debt Ceiling

 

The U.S. is scheduled to hit the debt ceiling in March 2015, setting the stage for a political showdown as the potential for default is leveraged for political concessions. This has both positive and negative potential. On one hand, the debt ceiling could be used put forward modest budget reforms that make the U.S. economy more robust in the long-term. On the other, prolonged debate over the debt ceiling could inject considerable uncertainty into the economy, and actual default would be ruinous.

4. Global Slowdown

Weak global growth poses a threat to our nascent economic recovery. The IMF estimates that there is nearly a 40% chance of the Eurozone re-entering a recession in the next six months. Asia is facing headwinds, with contracting GDP in Japan and slowing growth in China. Even emerging markets are slowing due to weak demand and increased geopolitical conflict. All of these factors could dampen U.S. growth prospects by restraining U.S. exports.

5. The New Republican Majority

The new Republican majority in the Senate and House has a significant opportunity. While there will be a temptation to pass symbolic votes — such as the repeal of the Affordable Care Act — these bills will not become law under the current President. Instead, Republicans should use their newfound power to pass serious, pro-growth proposals that will be hard for the President to refuse. This includes, but is not limited to, opening up the Keystone XL pipeline, lowering corporate tax rates, and allowing for more high-skilled immigration. These policies have wide bipartisan appeal and would increase economic growth and job creation.
Overall, the U.S. economy is expected to perform well next year. The Federal Reserve is predicting GDP growth ranging anywhere from 2.6% to 3.0%. There are relatively few outside factors that threaten to curtail this progress, aside from a severe global slowdown or unforeseen geopolitical conflict.

The biggest game changers in 2015 are likely to come from within the U.S. Between the Federal Reserve raising interest rates and Congress negotiating on the debt ceiling and pro-growth policies, our policymakers have an inordinate ability to shape how the economy performs next year. Let’s hope they get it right.