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page 1 Print Personal Finance Adviser Search Archive Other Publications H ome 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. The Kiplinger Letter (ISSN 1528-7130) is published weekly for $117/one year, $199/two years, $263/three years by The Kiplinger Washington Editors, 1100 13th St. NW, Suite 750, Washington, DC 20005-4364. POSTMASTER: Send address changes to The Kiplinger Letter, P.O. Box 62300, Tampa, FL 33662. Subscription inquiries and customer service: Call 800-544-0155; e-mail [email protected]; or visit kiplinger.com/customer-service Editorial information: Tel., 202-887-6462; e-mail, [email protected] page 2 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. Remember, your subscription includes The Kiplinger Letter online page 3 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 page 4 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 P.S. Kiplinger’s Retirement Planning 2016 is filled with useful advice to help with your retirement strategy. It costs just $5.95 per copy. Order online at kiplinger.com/go/retireKL or call 888-547-5464 and ask for operator 63. Copyright 2016. The Kiplinger Washington Editors, Inc. Quotation for political or commercial use is not permitted. Duplicating an entire issue for sharing with others, by any means, is illegal. Photocopying of individual items for internal use is permitted for registrants with the Copyright Clearance Center, 222 Rosewood Drive, Danvers, MA 01923. For details, call 978-750-8400 or visit www.copyright.com.