WASHINGTON, DC—The mid-term elections are now history and the outcome won't do much to change the outlook for 2015, says Cassidy Turley's Kevin Thorpe. “The Republican victory will provide a new roadmap for the Congressional agenda, but the more immediate issue will be how the federal budget is handled under the new leadership,” writes Thorpe, chief economist for the Washington, DC-based services firm.

At present, that budget is locked into place until September of next year via a two-year agreement placing specific caps on discretionary spending programs. “Republicans may decide to push for spending increases in defense, but the Democratic minority is unlikely to agree unless the spending increases include non-defense programs as well,” Thorpe writes. “Moreover, the President can still veto any bill the new Congress submits, and the Republican majority still lacks the votes to override a veto.”

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

Even without a budget compromise, “the US economy has already adjusted to the lower federal spending levels and tax environment,” according to Thorpe. “That means the federal sector will no longer be a major drag on economic growth.” In fact, he notes, “increases in federal spending added 0.67% to GDP growth in the third quarter of 2014—the first positive contribution from that sector since 2009.”

Real GDP growth is expected to accelerate to 3.3% in '15, or more than a full percent better than the average growth rate seen over the past five years. This stronger growth rate, predicts Thorpe, will lead to “greater job creation next year” with 2.7 million new nonfarm payroll positions, thereby making '15 the strongest year thus far in the current economic expansion.

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

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

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