Risk Factors For The U.S. Economy In 2015

by: Disruptive Investor


US GDP growth has been robust, but there are certain risk factors that need to be closely monitored in 2015.

The oil & gas industry has created significant job opportunities since 2007 and if oil prices remain low, there can be potential job cuts and a negative impact on employment.

A strong dollar can also impact certain sectors and US GDP growth. I believe competitive devaluation of currencies will be seen in 2015.

US markets remain attractive with the energy sector being a value buy and the healthcare sector being a relatively recession proof sector to consider.

The US GDP growth has been surprisingly resilient with 3Q14 GDP growth coming at 3.9%. The civilian unemployment rate has also declined to 5.8% and there seems to be no deflation threat with the CPI currently at 1.7%. The consumer confidence is also at the highest levels since the financial crisis and all these factors make me believe that the US economy will remain strong into 2015.

However, there are few risk factors that need to be monitored as these factors can negatively impact GDP growth, employment and consumption. This article talks about these factors and their potential impact on growth.

The decline in oil & gas prices comes as a benefit for some countries while it is a big loss for others. China has been hoarding oil and the country plans to increase its oil inventory further in 2015 to benefit from lower oil prices. India's current account deficit and stubborn inflation has declined as oil prices slumped. These countries are the clear beneficiaries of decline in oil prices.

Russia, which is likely to slip into recession in 2015, is one of the biggest losers. The Russian Ruble has tumbled and things look bleak for the country's economy, stock markets and currency. Saudi Arabia also stands to lose as the country's budget will not be balanced if oil remains around the current levels.

The United States, which has emerged as one of the biggest oil producers in the last few years has a mixed story. Lower oil prices would mean a decline in consumer inflation and that is a positive factor with winter approaching. The negative factor is the impact of decline in oil prices on the US private oil & gas sector. In particular, the impact of lower oil & gas prices on the employment in the sector.

The chart below from EIA is as of 2012. However, it puts thing into perspective when it comes to the impact of the oil & gas sector in employment generation in the country.

It is clear that the biggest driver for employment has been the oil & natural gas industry. If oil prices sustain at lower levels for a prolonged period, there is likely to be significant job cuts and this will impact the employment scenario as well as the GDP growth prospects.

According to another report from Parliament publications, UK -

The US, the unconventional oil and gas sector and energy-related chemicals activity was supporting 2.1 million extra jobs and had added $284 billion to US GDP (as of 2012).

The second chart below from BLS is until October 2014 and it is indicative of the fact that the employment in the oil & gas extraction industry is still surging.

It remains to be seen how the employment numbers trend in 2015 when the real impact of lower oil & gas prices will be seen. How fast oil & gas prices can recover remain the key factor and if there is no price recovery in 2015, the industry is certain to see job cuts.

I believe that this is one of the most important factors to watch out for in the US economy for the year 2015.

The second factor that needs to be watched, and is closely linked to the first factor is the employment-population ratio and the number of people not in the labor force.

As the chart below shows, the employment-population ratio touched a low of 58.5%, before moving higher to 59.2% as of October 2014.

A higher employment-population ratio is positive as it implies a higher number of working individuals to support the total population. However, if the oil industry slumps, the employment-population ratio will again trend lower and this will negative impact the consumption trend in the US, which is currently robust.

If the oil & gas industry slumps, the number of people not in the labor force will also surge further. As the chart below shows, the number is already at its record high.

In other words, weakness in one industry can trigger a chain reaction of negatives. In particular, the industry that has been a major job growth driver since the crisis can also take the economy down.

The third factor that needs to be closely watched in 2015 is a stronger dollar. With Japan unveiling massive quantitative easing and the Euro-Zone also likely to step-up stimulus measures, the dollar is gaining strength and this can be negative for the competitiveness of certain sectors of the economy.

I believe that the policymakers will engage in competitive devaluation of the currency if the dollar gains further strength in 2015. For now, it remains a potential risk factor. It is also interesting to note that a stronger dollar would also mean that oil prices trend lower and this is just an example of how the dollar strength can impact certain important sectors.

There is no doubt that the US economy has done exceedingly well relative to other developed market economies. However, certain risks need to be monitored before concluding that the US economy will have a bright 2015.

From an investment perspective, the best advice is diversification. Not only sectors, but also in terms of regions. I would remain invested in the US equities (NYSEARCA:SPY) until there are some significant red flags related to the economy.

However, investors need to be selective in their stock picking. I believe that Wal-Mart (NYSE:WMT) will do well in the festive season with the consumer confidence surging. The stock also happens to be a low beta stock and offers a good dividend yield of 2.2%.

I would also consider gradual exposure to the beaten down energy sector and the Vanguard Energy ETF (NYSEARCA:VDE) provides exposure to the sector. There are specific energy stocks that I have discussed in the recent past and I remain bullish on those stocks.

Another sector that has supported the economy after the financial crisis is the healthcare sector in terms of jobs creation and impact on GDP. I remain positive on the healthcare sector and the Vanguard Healthcare ETF (NYSEARCA:VHT) is a good way to consider exposure to the sector. Individual companies like Johnson & Johnson (NYSE:JNJ) also look attractive with global diversification and a relatively recession insulated business. JNJ also offers a healthy dividend yield of 2.6%.

Among international markets, I remain bullish on India and the coming year will be robust in terms of GDP growth for the country. The iShares MSCI India ETF (BATS:INDA) gives a broad exposure to the Indian markets. However, I am specifically bullish on ICICI Bank (NYSE:IBN) with India's GDP growth accelerating and with interest rate cuts coming in 2015. The country's largest private sector bank is well positioned to grow at a strong pace in the coming years.

In conclusion, selective stock picking can still yield good results in terms of returns even if the US markets are trading at record highs. However, investors need to closely watch out for the risk factors and its impact on the job market. Profit booking would be suggested if the discussed negative sentiments start impacting the economy.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.