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1100 13th Street NW, Washington, DC 20005 • kiplinger.com • Vol. 93, No. 15
Dear Client:
Washington, April 15, 2016
Open trade between the U.S. and Cuba?
It won’t happen quickly, but it will come,
ending an embargo lasting more than half a century
and opening a new, nearby market for U.S. companies.
CUBA
The embargo will be lifted within five years
as Congress gives in to growing pressure
and looks to stall China’s interest in the island nation.
(Unless Sen. Ted Cruz, R-TX, is elected president.
He’s ruled out any loosening of the trade restrictions.)
Poised to prosper first in a more open Cuba:
U.S. suppliers of vehicle parts and food…
wheat, corn, poultry…along with farm equipment.
Cuba already imports products from elsewhere,
but low shipping costs will make U.S. goods inviting.
The market will be small, especially at first.
Cuba’s imports now total about $6.7 billion annually.
ECONOMIC FORECASTS
GDP growth
2.2%-2.4% in ’16, vs. 2.4% in ’15;
accelerating in second-half ’16
Interest rates
10-year T-notes at 2.4% by end ’16;
30-year mortgages at 4.2%
Inflation
2.4% by end ’16,
up from 0.7% at end ’15
Unemployment
Declining to 4.6% by end ’16,
from 5% now
Crude oil
Trading from $35 to $40/bbl.
into May
Consumer confidence
Ramping up more broadly will take longer…
Trending up gradually
Decades or more to move beyond the Castros
with job and wage gains
and establish property rights and consumer credit
Click here for exclusive, Web-only details
so the Cuban economy can fully develop and expand.
of these Kiplinger forecasts
There are no neighborhood banks for automobile loans,
let alone a broader financial structure to allow for investment and property purchases.
But by mid-century, Cuba should be a Caribbean jewel for trade and culture.
Opportunities for the U.S. will keep growing as the older generation dies out.
Cuba is young…over half of its 11 million people are under 45…and many of its citizens
are eager to embrace broader horizons than they and their parents have had to accept.
Though a big payoff is years away, large American firms aren’t waiting.
A few big players are already establishing a foothold, including Caterpillar,
Ford, Bank of America, Coca-Cola and PepsiCo. Also part of the first wave in Cuba:
Engineering firm Bechtel, agrichemical giant Monsanto and some solar power firms.
They’re banking that staking out turf now will lead to huge paydays later,
as a consumer-oriented society develops and the need to expand energy grids
and rebuild the island’s long-neglected infrastructure evolves. This will happen first
in Havana, followed by Varadero, Santa Clara, Cienfuegos and the city of Guantánamo.
Uncle Sam also has a strategic interest in opening pathways into Cuba:
Keeping China from expanding its presence in the Western Hemisphere,
the way the Soviets did in the early years of the Cold War. Many Cuban exports,
which total $2.4 billion a year, go to China. The bill of fare includes valuable metals
such as nonferrous nickel, copper and tungsten. U.S. firms that tend to focus
on natural resources development are eager to get a green light to move into Cuba,
and will do so quickly once the embargo is lifted. They and other American interests
will get financial help from the Overseas Private Investment Corp. and the World Bank.
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April 15, 2016
INTEREST
RATES
Inflation will continue to creep up, despite its pause in March.
That means interest rates will be heading higher, too. Despite recent talk
from Federal Reserve Chair Janet Yellen about the need for a gradual approach,
the Fed is still serious about lifting rates to keep inflation from getting out of hand.
Excluding food and energy, the Consumer Price Index is up by a 2.2% yearly rate.
The Fed’s preferred inflation gauge is a tad lower but is nearing the 2% mark.
Figure on at least one rate hike for sure, likely coming in June or July.
And perhaps another by year-end. The Fed wants to return interest rates
to a more normal level after years of near-zero rates. But it has to tread cautiously
as the shaky global economy forces its overseas counterparts to push rates down.
REAL
The sizzling clip of apartment rent increases is finally starting to cool a bit
ESTATE as recently built units bring some much-needed new supply to the market.
Look for rents to climb by a still robust 4% both this year and next after rising by 5%
in 2015. The national vacancy rate has edged up from the low of 4.2% hit in 2015,
giving renters a bit more bargaining power. Expect the rate to reach 5% as 2016 ends,
prompting builders to slow down on construction of rental units in most cities.
The hottest markets, such as New York and San Francisco, could buck the trend.
CREDIT
Look for auto lending to downshift this year as car sales take a breather
after last year’s record pace and lenders curb loans to subprime borrowers.
The delinquency rate on auto loans has already picked up a bit, mostly in states
hit by the energy industry slump. Still, no reason to fear a crisis in subprime loans.
Student lending will also ease. More young folks will seek out employment
in the strengthening job market, rather than go to college. Meanwhile, defaults
on student loans will stay high, though masked by loan deferments and restructurings.
Other types of consumer debt will grow…retail credit, consumer loans, etc.
FINANCE 2016 is shaping up to be a good year for venture capital. In the first quarter,
investors plowed $12 billion into VC funds, the largest influx in a decade.
Institutions such as insurers and pension funds will continue to see potential
for juicier returns on investments in small, privately owned start-up companies.
The hottest sectors for VC investors: Health care, technology and commercial services.
Note that initial public offerings stand to decline as venture capital heats up.
With more funds available from deep-pocketed private investors, owners of start-ups
won’t need to rely as heavily on going public to raise capital for expansion plans.
Uncle Sam will be slower to slap tough new regulations on big financial firms
after a federal judge nixed the feds’ labeling of MetLife as “systemically important.”
Financial institutions receive the designation if their failure would create a threat
to the overall financial system. Systemically important firms must hold more capital
and adhere to other regs set by the Federal Reserve. But the recent court ruling holds
that regulators must consider the costs such a designation imposes on financial firms
and adequately explain their selection criteria…steps they didn’t take with MetLife.
ENERGY The latest round of oil exporters’ efforts to cut output obscures a key fact:
The odds of them actually sticking to an agreement to do so are not good.
Since the price of oil began sliding in late 2014, many exporting nations have argued
that coordinated action to cut exports is needed to bring supply in line with demand.
Getting the major exporters to agree on such a deal has been tough.
No country wants to reduce its own production and risk losing market share
if some of its rivals cheat on the pact and secretly pump more than they agreed to.
The temptation to break the deal and grab more oil revenue will always be strong.
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April 15, 2016
ECONOMY One segment of retail sales that’s going like gangbusters: Building materials,
along with other home improvement items. The revival of the housing market
has more Americans sprucing up their homes prior to putting them up for sale,
while others are tackling remodeling projects. Also up: Sales of lawn and garden gear.
STATE
Midwestern states will see solid if unspectacular growth this year.
BY STATE Indiana will pace the region with GDP growth of 3%, up briskly from 1.2%
in 2015. But job gains, as in other parts of the Midwest, will trail last year’s pace,
partly because many firms increased their hiring last year. The Hoosier State
will see employment slow to 1.5% versus 1.9%. Production of autos and auto parts
is a bright spot: Subaru, for example, is expanding its sole U.S. plant in Lafayette.
Kentucky’s recovery is gaining steam, especially in the metro areas
of Louisville and Lexington, where GE and other firms produce appliances
and other home-related goods. But coal mining production will continue to drop.
The Bluegrass State’s GDP will grow 2.5% from 1.8%. Jobs...up 1.9% from 1.5%.
Michigan’s future continues to brighten, spearheaded by the auto industry
and symbolized by Detroit’s emergence from bankruptcy. Auto icon General Motors
is expanding its Detroit headquarters at the aptly named Renaissance Center.
GDP will expand 2.3% from 1.3%, while employment will accelerate to 1.7% from 1.5%.
Wisconsin is poised for growth, and much of it will come from education,
health services, construction and transportation as the state diversifies its economy.
Milwaukee and Racine, in particular, are moving beyond a reliance on manufacturing.
The Badger State’s GDP will grow 2.3% from 1.2%. Jobs…up 1.3%, same as in 2015.
Ohio…also on an upward curve, despite persistent headwinds
against its significant steelmaking capacity. The state is working to lure new firms
by offering low business operating costs relative to other states, with some success.
Look for GDP to grow 2.1% from 1.3%, while job gains will edge up 1.6% from 1.5%.
Illinois is still feeling pain from the slowdown in export demand abroad,
which has dinged Caterpillar and other manufacturers of industrial machinery.
On the plus side, Chicago is getting a boost from a growing technology sector.
GDP will increase 1.5% versus 2%, while job growth will slow to 1% from 1.3%.
STATE
More states will do away with the so-called tampon tax, following the lead
TAXES
of Mass., Md., Pa., N.J. and Minn. Growing opposition to state taxes
on sanitary items is aimed at remedying what is seen as gender unfairness…
taxing women for products that are a basic necessity, similar to medical items.
Many states, for example, don’t tax prosthetics. And 49 of them exempt Viagra.
Among states looking to drop the tax: Calif., Conn., Ill., Mich., Ohio and Wis.
Washington, D.C., is mulling the move, too, and it may also include diapers.
(The trend is a global one: Canada eliminated taxes on feminine hygiene products
last year, and similar efforts are under way in Australia and the United Kingdom.)
Increasingly, states see lost tax revenues from the move as minimal.
PANAMA In the wake of leaks about how some rich folks hide their wealth…
PAPERS Financial watchdogs will turn a spotlight on the use of shell corporations
to shield the identities of people, the so-called beneficial owners, behind such firms.
The Treasury Dept. is preparing to require banks to identify individuals
who own at least 25% of a company that opens a bank account. At the moment,
there is no such requirement, making it easy for beneficial owners to open shell firms
without having to reveal themselves to bank regulators. In the U.S., three states...
Del., Nev. and Wyo...make it fairly simple to set up shell companies anonymously.
Treasury’s aim is to ferret out tax scams and other shenanigans.
Some members of Congress also want states to be involved in identifying
and tracking hidden owners, but legislation to require it won’t go anywhere soon.
For instant online access and searchable archives, go to kiplinger.com/start
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April 15, 2016
TRAVEL A recent change in policy on multicity airfares could cost you a bundle.
Before the change by United, Delta and American, multicity ticketing
would use the lowest nonrefundable fare on each segment of a trip to several cities.
The new policy combines the fully refundable fares available on each segment,
resulting in a price that is much higher than if you bought the tickets separately.
Business groups are in a lather and calling for a federal investigation,
suggesting collusion since the three airlines all changed their ticketing policies
at about the same time. But the carriers deny the changes were made in concert.
Better plan ahead for a longer wait in airport security lines this summer.
Record numbers of people flying, staffing cuts by the Transportation Security Admin.
and heightened security procedures are sure to exacerbate checkpoint snafus.
Consider applying for PreCheck, TSA’s fast-track security screening program
that allows low-risk travelers to wear their shoes, belts and jackets through security
while also keeping laptop computers in their bags. Once approved for the program,
which costs $85 for five years, you can use the much faster express lines at airports.
Congress is dialing up stronger security provisions for airport operations
as part of legislation to reauthorize the Federal Aviation Admin. this year or next.
Among the measures: An expansion of federal agents with bomb-sniffing dogs
at nonsecure soft target areas, such as passenger check-in and baggage claim areas.
Enhanced training of law enforcement officers for active-shooter incidents.
Stronger vetting of airport employees, including random inspections of workers
in secure areas. Better policing of airport perimeters. Plus a review of cargo handling.
LEISURE Theme parks are in for a strong summer. Close to 400 million visitors…
BUSINESS Americans and foreigners…will likely trek to U.S. amusement parks in 2016,
ringing up $22 billion in sales, buoyed by higher ticket prices and fewer discounts.
Digital thrills, courtesy of virtual reality technology, await at many places.
By wearing VR glasses on a roller coaster, for example, riders can be transported
to myriad other worlds while they’re being physically spun, dropped and looped.
Parks are betting that digital worlds, which cost far less to create than new rides,
will boost repeat business as thrill seekers seek different scenarios on the same ride.
Note several attractions opening this year: Legoland Discovery Center
in Phoenix. The Wizarding World of Harry Potter at Universal Studios Hollywood.
Typhoon Texas Waterpark in Katy, Texas. A multilevel laser tag venue in Olathe, Kan.
And in coming years: Disney’s Star Wars-themed lands in Calif. and Fla.
HEALTH As summer approaches, concerns about the Zika virus are on the rise.
Though a broad outbreak in the U.S. remains unlikely, more than 30 states,
as far north as Vt. and Minn., could be exposed to the mosquito-borne disease,
which has been definitively linked to a birth defect in infants known as microcephaly.
Uncle Sam is offering financial incentives to drug makers for a vaccine.
But a vaccine is at least a year away. Congress will also OK more funds
for mosquito control and rapid responses to outbreaks as well as vaccine research.
Yours very truly,
April 15, 2016
THE KIPLINGER WASHINGTON EDITORS
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