From taxes to interest rates to jobs, FOX Fan Central asked our business news guru Neil Cavuto for a 2005 economic forecast.
Was 2004 real estate’s last hurrah?
I don't think so. Many argue that because interest rates are moving up, home buyers will start opting out. I disagree. Generally just the opposite happens, as procrastinators jump off the fence while the getting's still good. Besides, just because short-term interest rates are moving up, long-term rates (to which most fixed-rate mortgages are pegged), are actually staying constant. In fact, they're down a little bit from last year. All of this is not to say some overly hot housing markets, particularly in California and Boston, won't cool a little bit. But cooling doesn't mean collapsing. I say we go from double-digit growth in those areas to mid-single-digit advances. Again, not bad. I remember the view of Bob Toll, the man behind homebuilding giant Toll Brothers, who put it rather succinctly: "They ain't building anymore land." Of course, that's a builder saying that, but with so many communities now enforcing strict zoning requirements and fewer homes being allowed per acre, I see supply being dwarfed by demand. That's a plus for housing.
Are better days coming for investors?
This sounds like a cop-out, but I always feel better days are coming for investors. My reference point is something called history. I keep a chart of the Dow Jones Industrials in my office. It dates back to the beginning of the last century. It's a remarkable chart because when you see it from afar, you see it going up. Up through World War I and World War II, up through the Depression, up through presidential scandals and energy crises and wars and strong dollars and weak dollars. To be sure, the periods when we're down are painful and seemingly endless, but in historical terms, they tend to be only blips. That's why I'm a long-term believer in stocks, because I'm a long-term believer in capitalism. I trust and like our system, warts and all. Sure, we have our excesses and bubbles, but in time, and over time, we do well. We advance through wars and terrors alike. So better days ARE coming for investors. I'm not smart enough to say that if you plunk your money in the market now you'll make a fortune next year, but I am smart enough to know history, and to appreciate the fact that if you stick with stocks over a ten-year horizon or more, you'll do well. Perspective is everything; appreciating the difference is the important thing.
What's your jobs forecast for 2005?
I see jobs continuing their modest improvement through the new year. Over the last 15 months or so, we've been averaging about 200,000 new jobs a month. Some criticize that pace, but slow and steady beats stopped and not budging to me, so I'll take it. Having said that, the collapsing dollar could put a pinch on further hiring if it makes it more difficult for U.S. manufacturers to both pay their people here and sell their goods here. Offsetting that, of course, is the fact that they can sell a lot more goods abroad thanks to that weakening buck. But barring a jolt, I see jobs picking up, even with the dollar (slowly) dropping and interest rates (slowly) rising.
Last minute tips for the 2004 calendar year to avoid tax trip-ups come April?
It goes without saying that you want to sock away as much dough as you can now toward tax-advantaged retirement accounts. You have until April 2005 to put money into an Individual Retirement Account, and until the end of this year to "try" and maximize your contributions to your company's 401k plan, if available. Charitable giving helps too. The more you front-load now, the more you can write off in April.
Are more federal crackdowns on Wall Street giants in the works?
I think we've seen the big crackdowns for the time being. The hidden corporate story of 2005 will be the U.N. Oil-for-Food scandal, and it could catch a number of multinational firms of all stripes. Even Tyco was caught up in the fuss. We still have no idea where all this will end up, but it's safe to say scandals never completely go away, although the size and breadth will likely recede.
President Bush’s second term — From the new budget to Social Security, what can Americans expect?
I think the President has a very tight time frame to get anything done on Social Security, the single most important issue facing Americans. I believe, and I get knocked for saying this on my show, that Social Security is broken, period. There are fewer people paying in, a lot more people taking out. You can't sustain a system like that. I have no idea what the single answer is, or whether there even is a "single" answer. Congress will have to wrestle with a variety of not-so-fun possibilities: scaling back benefits, increasing the retirement age, increasing taxes or a combination of all of the above. I personally think the president is on the right track in addressing this sacred third rail of politics, and thinking outside the box with things like private accounts is a step in that direction. But a lot of people get a lot angry on this subject. That's why it's crucial for Congress and the president to move fast. If they dilly-dally on this for a couple of years, all hopes for fixing this mess are gone. We're already on mid-term elections, and the next presidential election. The time for action, and boy do we need it, is now.
How far up will interest rates creep?
My own feeling on short-term interest rates is they're going up a lot, but gradually. The Federal Reserve's Open Market Committee meets every six weeks or so. I think at each such meeting we'll see a quarter-point hike in interest rates. That means by next year at this time we'll likely be staring at an overnight lending rate (Federal Funds Rate) of at least five percent, maybe more. That's probably an adequate equilibrium rate. The emphasis here is on "gradual" and not surprising the markets. Stocks have steadily advanced through the five interest rate hikes initiated since last summer. That's because stock traders saw this coming. I think stock traders see future hikes coming as well. Having said this about short-term rates though, it's important to remember that long-term rates aren't necessarily going to ratchet up at the same pace. They've been remarkably contained. As I said earlier on home mortgage rates, the fixed ones have actually decline year-over-year, mainly because the market sees the Fed successfully warding off inflation (the enemy of all things' fixed income). I see that trend continuing. Sure, long-term rates, like the ten-year note and 30-year bond, will rise but not dramatically enough to rattle investors or this economy.
Neil Cavuto is vice president of business news at FNC, and serves as the award-winning anchor of "Your World With Cavuto," the no.1 business news show on cable, seen weekdays at 4pm eastern. He also anchors "Cavuto on Business," seen Saturdays at 10:30am eastern. Neil oversees all business coverage for FNC including "Bulls & Bears," "Forbes on Fox" and "Cashin' In."