WASHINGTON, DC—The mid-term elections are now history and theoutcome won't do much to change the outlook for2015, says Cassidy Turley's KevinThorpe. “The Republican victory will provide a new roadmapfor the Congressional agenda, but the more immediate issue will behow the federal budget is handled under the new leadership,” writesThorpe, chief economist for the Washington, DC-based servicesfirm.

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At present, that budget is locked into place until September ofnext year via a two-year agreement placing specific caps ondiscretionary spending programs. “Republicans may decide to pushfor spending increases in defense, but the Democratic minority isunlikely to agree unless the spending increases include non-defenseprograms as well,” Thorpe writes. “Moreover, the President canstill veto any bill the new Congress submits, and the Republicanmajority still lacks the votes to override a veto.”

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Since most of the US senators scheduled to stand for re-electionin 2016 are Republican, “it may even be difficult to get a simplemajority between now and the Presidential election,” Thorpe writes.“That leads us to believe there will be few substantive legislativechanges.” Cassidy Turley's baseline outlook calls for federalspending levels to remain roughly status quo—which is to sayflat—for the next year.

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Even without a budget compromise, “the US economy has alreadyadjusted to the lower federal spending levels and tax environment,”according to Thorpe. “That means the federal sector will no longerbe a major drag on economic growth.” In fact, he notes, “increasesin federal spending added 0.67% to GDP growth in the third quarterof 2014—the first positive contribution from that sector since2009.”

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Real GDP growth is expected to accelerate to3.3% in '15, or more than a full percent better than the averagegrowth rate seen over the past five years. This stronger growthrate, predicts Thorpe, will lead to “greater job creation nextyear” with 2.7 million new nonfarm payroll positions, therebymaking '15 the strongest year thus far in the current economicexpansion.

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“The US economy is accelerating and the property markets arebeginning to resemble pre-recession form,” Thorpe writes. “Real GDPis on track to come in just above 2% for 2014 (we estimate 2.3%),but the real underlying growth rate—absent the weather-induced dropin the first quarter of the year—is closer to 4%. Demand for goodsand services, as measured by final sales of domestic product,continues to increase. So, too, has the need for businesses to hireadditional workers.”

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An acceleration in economic indicators, naturally, raises thequestion of where interest rates are headed—or more to the point,when and how quickly. “The CPI for shelter increased 3% inSeptember, compared to less than 2.5% a year ago,” Thorpe writes.“The way dots are starting to connect indicates inflation will pushup more meaningfully in '15.” That supports a consensus that theFederal Reserve will begin to raise the federal funds target ratein Q2 of next year.

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“But normalizing rates will take time,” he notes. “The Fed'starget rate will remain well below the natural rate, widelybelieved to be 4%, into 2016 and possibly into 2017.”

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Paul Bubny

Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.