U.S. Economic Recovery Picks Up Speed as Year-End Approaches 11-21-14

Home sales bounce back in October:

Sales of existing homes rose to the highest level in a year in October, the latest sign that the U.S. housing recovery is shaking off the shock of last year’s jump in mortgage rates. The National Association of Realtors said that sales of previously-owned homes climbed 1.5% last month to a seasonally-adjusted rate of 5.26 million – the highest pace since September 2013. It was the sixth time in seven months that sales rose from the prior month. However, overall sales remain far below prerecession levels and have yet to regain their July 2013 pace of 5.38 million.

 

The Wall Street Journal noted this week that rental apartment construction is at a 27-year high. Construction of multifamily housing units-those with five units or more-is running at its strongest 12-month pace since 1989. Moreover, the share of those units being constructed as rentals is at its highest since record-keeping began in 1974.

 

Wages and jobless claims:

Wages and salaries climbed last quarter by the most since 2008.  Evidence of a rebound in employee earnings is appearing in certain industries and regions, including Texas and North Dakota, that are riding the energy boom and the strengthening homebuilding market in the U.S. Southeast. While plenty of slack remains in the economy, raises are likely to filter to other areas as job creation whittles away at U.S. unemployment.

 

Fewer Americans filed for unemployment benefits last week as the need to retain staff keeps firings at the lowest levels in more than a decade.  Jobless claims fell by 2,000 to 291,000 in the week ended Nov. 15 from an upwardly revised 293,000 in the prior period, a Labor Department report showed today in Washington. The median forecast of 51 economists surveyed by Bloomberg called for a decline to 284,000. It was the 10th straight week the number of claims has been lower than 300,000, which hasn’t happened since 2000.

 

U.S. Oil Production changes Geopolitical Landscape:

A new age of abundant and cheap energy supplies is redrawing the world’s geopolitical landscape, weakening and potentially threatening the legitimacy of some governments while enhancing the power of others.  Some changes already are evident. Surging U.S. oil production now enable America and its allies to impose tough sanctions on Iran without having to worry much about the loss of imports from the Middle Eastern nation. Russia, meanwhile, faces what President Vladimir Putin last week in China called a possible “catastrophic” drop in oil prices – and its economy is also battered by U.S. and European sanctions over its role in Ukraine.  These events are putting enormous pressure on Putin which may lead to continued geopolitical risks for the markets in 2015.

 

Oil is the most geopolitically important commodity in the world. It drives economies around the world and the bulk of it up until the U.S. oil boom was located in some very volatile places like the middle east. Now the world will no longer be as dependent upon oil coming from the middle east which could have positive economic and geopolitical advantages for the U.S. and Europe.

 

Oil prices have dropped more than 30 percent during the last five months to around $75 a barrel as U.S. crude production reached the highest in more than three decades, driven by shale fields in North Dakota and Texas.  Saudi Arabia and Kuwait have begun to push prices down in response, in an effort to protect their market share and try to force producers in the U.S. and elsewhere to reduce output. So far, U.S. companies aren’t flinching, they have more staying power than many of Saudi Arabia’s 11 partners in the Organization of Petroleum Exporting Countries, or OPEC. 

 

Oil prices are not likely to continue to fall at the pace they did in 2014.  The price of oil will always be vulnerable to a terrorist attack on oil fields in the volatile Middle East or other global conflicts. So too could a cutback by OPEC — which meets on Nov. 27 in Vienna.  The other factor we think is being missed by many commentators is the chance that the U.S. and other parts of the Global economies could be on the verge of a higher growth period leading to a jump in global oil demand which would put a floor under oil prices very quickly.

 

China lowers Interest Rates to boost growth:

The People’s Bank of China (PBOC) cut benchmark interest rates for the first time in two years. In an effort to prevent a further slowdown in both the economy, the PBOC cut the one-year deposit rate by .25% to 2.75% and the one-year lending rate by .40% to 5.6%. The Chinese central bank also said that it would give banks more freedom to set their own interest rates. The move comes after GDP growth in the world’s second-largest economy slowed to a five-year low of 7.3% last quarter.

 

European Officials are considering new tools for growth:

ECB President Mario Draghi said today that the euro zone economy is likely to remain stagnant in the short-to-medium term and the European Central Bank stands ready to act fast to combat low inflation. “A stronger recovery is unlikely in the coming months,” Draghi said. “The inflation situation in the euro area has also become increasingly challenging,” he added. “We see that it has been essential that the ECB has acted -and is continuing to act-to bring inflation back towards 2%.” Draghi’s comments heightened speculation that the ECB may be on the cusp of launching a U.S.-style sovereign debt purchase program.

 

Tax Planning tip for year-end – Wash Sale Rule Deadline: 

If you sell an investment in an after-tax account and realize a capital loss, you are prohibited from buying the substantially identical investment within a 30 day window before and after the sale, otherwise the loss is disallowed.  When investors own a position that has decreased in value since it was purchased, often times they want to own the same position but also want to utilize the unrealized loss available.  One approach to this is to buy the same number of shares again at today’s market price with the intention to be purchasing when shares appear undervalued.  The investor would then sell the original number of shares after 30 days to recognize the available capital loss. 

 

The deadline for this particular method in 2014 is to purchase the new shares by December 1st to be able to realize the loss on the original investment before the end of the year.  The other option is to sell the original shares first and then repurchase the shares after 30 days.  This sale just needs to occur before December 31st and shares can be repurchased in 2015.  

 

Capital losses can help offset realized capital gains for the year.  If losses exceed capital gains, the amount of losses can then offset up to $3,000 of ordinary income ($1,500 if married filing separately).   Thus using available losses is a good way to help decrease adjusted gross income.   Any unused losses can be carried forward to future year tax returns. 

 

This publication is provided as a service to our clients and associates of PFA solely for their own use and information.  The material is derived from sources believed to be reliable but its accuracy and the opinions based thereon are not guaranteed and have not been verified.  The content in this publication is for general information only and not intended to serve as individual investment advice.  You should seek independent advice from a professional based on your individual circumstances.