Things to watch in 2016: Steady economy is the new hot trend

By

Published:

 

WASHINGTON — After a year free from government shutdowns and other self-inflicted wounds, the U.S. economy in 2016 is expected to power forward at a steady, albeit unspectacular pace.

Given all the global uncertainty, steady is the new strong. A six-year U.S. economic expansion, long by historical standards, rolls on.

Japan remains in the doldrums, China’s growth has slowed precipitously and emerging markets such as Brazil and Mexico are boiling over with internal discontent. Even the Canadian dollar is slumping badly against the U.S. greenback.

Here are three things worth watching in the U.S. economy in 2016:

Growth’s gear shift

Since the economic recovery began in mid-2009, it’s been led by exports and the energy sector. That’s a trend now in reversal.

“The consumption side is picking up. The domestic-driven parts of our economy are strengthening and we’re likely to see an economy that is led less by production and more by consumption,” said Mark Vitner, a senior economist at Wells Fargo Securities in Charlotte, N.C.

Mainstream economists project 2016’s annual growth rate in the ballpark of 2.5 percent, about the same as 2015.

“But beneath the surface, there really is quite a bit of change,” said Vitner.

Here’s why.

During the Great Recession, the U.S. dollar weakened against global currencies, making U.S. goods and services cheaper, particularly farm and ranch products. Exports boomed, as did employment in manufacturing and other export sectors.

Now, much of the world economy is in slow-growth mode. The U.S. dollar has strengthened against European and Asian currencies. It’s meant a 4.3 percent drop in exports for the first 10 months of this year, according to the Census Bureau.

Similarly, when oil prices were over $100 a barrel in the prior decade, it set in motion a massive wave of drilling for oil and natural gas. U.S. production reached record levels in 2014, and the energy sector hired like mad.

The expansion added to a global oil glut and ultimately a collapse in energy prices. Americans now enjoy gasoline priced below $2 a gallon in much of the nation. Since a peak in December 2014, employment in mining — the category under which oil drilling and related services fall — has dropped sharply. The Labor Department estimates more than 123,000 jobs lost in the sector since the peak.

Those two troubling trends, however, are offset by the growth shift.

“We are at an inflection point,” Scott Anderson, chief economist for Bank of the West in San Francisco, said of the consumer-driven expansion.

“I think it’s a real phenomenon,” added Anderson. “California, Washington, and Oregon — they are going to benefit from the strength in consumer spending and the drop in oil and energy costs.”

Consumption is booming. That’s benefiting retailers, restaurants and, particularly, sales of big-ticket items such as automobiles.

Auto industry analysts J.D. Power and LMC Automotive expect the best December sales since 2005, with 2015 going down as a record year with 17.5 million new light vehicles sold.

“We now have greater confidence that record sales in 2015 will lead to yet another volume record in 2016,” Jeff Schuster, senior vice president of forecasting at LMC Automotive, said in a statement.

Jobs, jobs, jobs

The economy is in a virtuous cycle, where hiring brings more sales and thus more hiring.

“The improvement in employment conditions …has occurred amid continued expansion in economic activity,” Federal Reserve Chair Janet Yellen said in a Dec. 17 news conference.

The unemployment rate was 5 percent in November, down sixth-tenths of a percentage point since December 2014. It’s projected by Yellen to go even lower next year. Although wage growth has been muted throughout much of the recovery, it has gained steam since summertime.

Two signs to watch in the job market are an easing of the still-elevated number of people reporting involuntary part-time employment, and a return to more typical rates of labor force participation.

Housing liftoff

Sales of new and existing homes accelerated in 2015 and are expected to keep growing in 2016.

Surveys of lenders continue to show that credit is becoming more available for homeowners, aided by new jobs for millions more people now working, particularly in robust state economies such as populous California.

“They’re all adding income to families or single individuals, who are now able to go out on their own instead of living in their parents’ basement,” said Lawrence Yun, chief economist for the National Association of Realtors.

Yun expects a moderate annual increase in sales of existing homes of around 7.3 percent in 2015, rising 2.9 percent in 2016. Even brighter is the outlook for new-home sales, projected in 2015 to grow at 14.9 percent over 2014 levels, and 16.7 percent in 2016.

“Independent of conditions, builders have had much room to produce more without any concern,” Yun said, citing tight housing supply in many metro areas.