Your Finances in the Year Ahead

It is difficult to predict what the new year may have in store for us. But when it comes to economic issues, there are usually some signs that we can look to as an indication of what we can expect for the year ahead. For consumers, investors, and savers, the current economic condition of the country appears better than ever, but not without some storm clouds on the horizon.

Interest Rates

In their most recent meeting, the Federal Reserve announced that it is raising its key interest rate, the fed funds rate, by a quarter of a point to a range of 2.25 to 2.5 percent. This was the fourth increase in 2018 and brought the benchmark rate of the Federal Reserve to its highest point since the year 2008. In its policy statement, the Federal Reserve indicated that it anticipated only two additional rate hikes for the year 2019.

“The Committee judges that some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term,” the statement said.

Rate hikes negatively affect borrowers. Whether or not the Federal Reserve hikes rates twice in 2019, borrowing rates are going up, and those who have variable rate debt such as credit card balances or adjustable rate mortgages will feel its impact first. A quarter point rate increase by the Fed might be reflected as soon as one to two statement cycles later for consumers, and to avoid taking too much of a hit, it is prudent to start paying down any variable rate debt aggressively. For individuals who have variable rate home equity lines of credit (referred to as a HELOC) consult your lender to see if you can move to a fixed rate. Being proactive can help insulate you from future rate fluctuations.

Those that are in a financial position to save and those who are drawing off of their savings in retirement can make a bit more off of their money than in years past. It can pay off to shop around when looking for a savings account, as many banks are offering between 2.5 and 3 percent on balances. Additionally, CD’s and money market fund rates move up, making them more attractive, and bond yields also climb alongside interest rates. Yields have been at record low levels since the Great Recession, keeping pace with relatively low inflation. With rising yields, bonds and bond funds may be worth another look and play a larger part in a diversified portfolio.

Gas Prices

Gas prices in 2019 may be relatively stable compared to 2018. Many analysts see 2019 book-ended by stable prices between $2.35 and $2.40 a gallon with fluctuations and price swings starting in the second quarter. Prices will likely rise for both crude oil and gasoline mid-year. “The highest prices should occur in the second and third quarters,” according to Tom Kloza, global head of energy analysis for the Oil Information Service. Kloza is in the majority opinion and anticipates national averages in the $2.75 to $2.85 a gallon neighborhood, with many states beginning to flirt with $3.00 a gallon or more during this time.

For the last few years, Americans have benefited from low prices at the pump, and in many ways, our lives have been shaped by this allowing us to allocate money and resources to other spending categories. Logically, if individuals are spending more on gas and fuel, consumer spending in other areas is likely to decline. One of the biggest categories that people quickly change when gas prices spike is their discretionary spending, like dining out. From a personal finance perspective, it is always important to continuously monitor your financial position to ensure that you’re prepared not just for unexpected life events, but also any unforeseen economic trends, such as a rise in the cost of living.

Jobs and Wages

2019 is expected to be another banner year for workers and employees. Unemployment is at record low levels and is likely to continue to fall in the new year. Additionally, there are a record number of job openings across the country in nearly every industry. With such tight labor conditions, wage growth for workers is expected to continue and accelerate. Workers have the upper hand when it comes to negotiating with their employers, and this should remain the case for the foreseeable future. One of the core drivers for this tight job market is that in the U.S., we have an aging workforce and extremely low birth rates. For the first time in our country’s history, there will likely be more retirees than children under the age of 18. As older workers leave their jobs for retirement, there will be a continued struggle to fill those roles, only exacerbating the problem.

To reiterate, dissatisfied workers are winning, and astute job seekers are winning more. So how can consumers, workers, and job seekers set themselves up for success and leverage the economic environment for their ultimate benefit? First and foremost, ask for a raise. Whether you feel undervalued or you are being paid less than the market rate for the work you deliver, it can’t hurt your position to be a squeaky wheel, all other factors considered. Second, be able to substantiate your good performance; communication is key. Third and finally, prepare for rejection. Get ready to resign your current position if you feel like you have to, but only after searching for a new opportunity. Again, in a tight job market, job seekers are in the driver’s seat.

2019 has a lot to live up to in the minds of business news network pundits, analysts, and economists. Downside pessimism has increased at a dramatic pace, and catchphrases and terms like recession probability, corporate credit risk, market valuation, and earnings revisions are becoming increasingly widespread and common not just in the financial press, but also on social media. But through the noisy commentary and tweets, it is easy to lose sight of how our economy is performing in terms of economic growth. Consumers, investors, and savers have a lot to be grateful for with low inflation and a tight job market working in their favor and for the time being, we have plenty to celebrate.

For more information on economic conditions and leading/lagging indicators, monetary policy, or just to chat about financial planning, send me an email.