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Chief Investment Officer, BKD Wealth Advisors LLC
Chief Investment Officer, BKD Wealth Advisors LLC

2015 Economic Outlook: Jeff Layman

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With more than $2 billion in assets under management firmwide, Jeff Layman helps shape financial decisions in southwest Missouri and beyond.
2015 Projection
“International stocks are really due to have a good year relative to U.S. companies.”
SBJ: How did southwest Missouri’s economy fare in 2014?
Jeff Layman: The easiest way to address that is to look at things from a broader U.S. macroeconomic level. I think directionally the trends are going to be very similar. We got off to a tough start to the year, we had some bad winter weather come through. We had a contraction in the U.S. economy in the first quarter of the year, a decline of about 2 percent. Though there was a lot of anticipation about second-quarter gross domestic product growth, was that completely weather related or was there more underlying weakness developing? As it’s turned out, we rebounded 4.6 percent in overall GPD in second quarter and close to 4 percent in the third quarter just ended. The U.S. economy has actually hung in there pretty well. Those trends play through to southwest Missouri.

SBJ: How will next year compare? Will the upward GDP trend continue?
Layman: Things shape up pretty well going into 2015. If you look at the broad U.S. economy, almost 70 percent is accounted for by personal consumption. That drives a big part of the U.S. economy, which is much more than, for instance, China, where it’s less than half of the economy there. Being a consumption-oriented economy, what are the factors that shape that? There are several things and, by and large, they are all positive. You have unemployment almost back to the level of 2007. The more people working, the more income there is to spend. You have a huge reduction in the energy tax, in the sense that who would have thought we would see gas prices with the “1” handle on them. That’s significant because what is not spent there leaves more discretionary income to spend in the broader part of the economy. Another factor is the dollar has gotten stronger. The dollar buys more goods in other currencies.

SBJ: Are investors still recession minded?
Layman: Beginning in mid-2013, investors have become less risk adverse. We have had three years now since the ordinary, run-of-the-mill 10 percent market correction having not had to experience the anxiety the downside market movements cause. Investors have been emboldened a little. By and large, what we see across our client base, it’s not irrational risk taking by any means. At the margin, people become more confident and return oriented versus the risk mindset that existed.

SBJ: How does that mindset extend to consumers?
Layman: A lot of people deferred purchases like cars, homes, furniture, when things seemed less stable. To some extent, we have a bit of catch-up going there. You can see that in auto sales where the fleet of cars has gotten about as old as it’s ever been, about 11 years. Part of that is improvement in quality and durability, but part of it is deferred purchase.

SBJ: The Midwest Consumer Price Index recorded an 8.1 percent drop in motor fuel prices in November. What’s the break-even point for oil prices?
Layman: It’s been tough on the energy companies. There are a lot of public companies in the energy sector that are down in [stock] price, anywhere from 20 percent to upwards of 60 or 70 percent. At some point, this has been a topic of debate, I’ve heard around $60 or $70 [per barrel]. Most say $50 is a more accurate break-even for the companies. Many believe in the $50-a-barrel oil range. Some of these projects are going to go offline because it’s not profitable to extract at those levels. That should be a natural stabilizer of the price. I’m seeing signs of that now.

What’s happened to the price of oil in the last five months … poses a bit of a risk. To the extent that the price of energy or oil stays low, that may cause a stop to the pace. If it lingers long enough, it may cause job loss.

The decline in the price of oil has been pretty magnificent, which is great for the consumer, but hasn’t been so great for those industries.

SBJ: Where are interest rates headed?
Layman: The one thing we can say with a reasonable amount of certainty is the Federal Reserve is going to come off their zero interest rate policy in 2015. Most think that is going to happen around the middle of the year, sometime around the second quarter. Keeping in mind the Fed directly controls short-term interest rates and they have held those at zero for about six years, it obviously creates a situation where bank accounts don’t offer yield and keeps the cost of funds very low. As the economy continues to improve, they will likely raise those rates … from the artificially suppressed levels.
 
SBJ: What areas of concern are you keeping an eye on?
Layman: The U.S. economy and stock market have done far better in 2014 than any foreign markets. The U.S. has been very strong, with double-digit returns. In most parts of the world, economies are a lot softer and economic growth is less than stellar. The reason this is important is if you think about the S&P 500, for instance, about 35 to 40 percent of what they produce is sold abroad. You get the opposite dynamic. If U.S. consumers are buying goods with a strong dollar, they are getting more bang for their buck. The opposite occurs for our companies exporting goods; when the dollar is strong, goods become more expensive. We are keeping an eye on world economies. Unless they start to show some improvement, they could potentially be a drag on some of the good things that are happening in this economy.[[In-content Ad]]

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