Economic Forecast for 2016: Slightly Better Than 2015

Looking at 2016, the domestic economic landscape looks solid, albeit unspectacular. The unemployment rate should continue falling, house prices are likely to rise by 5%, and the economy will be led almost entirely by the continuing improvement in household balance sheets, and in conjunction with increased employment and slightly faster wage growth. Government spending will be slightly higher in 2016 (but not enough to matter), capital expenditures by firms will remain weak, and exports will continue to suffer due to the strong US dollar. The most serious domestic problem is weak inflation, and it should begin to increase. Despite continuing poor global economic growth, the American economy will not weaken, but is also unlikely to strengthen much.

With this in mind, I expect full-year 2016 GDP to come in at 2.4%, slightly higher than the expected 2.2% GDP growth experienced in 2015. New housing starts should increase by about 12%, with total starts coming in at 1.25 million. Single-family starts will likely total 830,000, up from 710,000, while multifamily starts should hit 410,000, up from 400,000. New and existing home sales should rise by about 4% and end the year at 6.0 million, with mortgage purchase volume advancing by $60 billion and refinance activity falling by about $250 billion. Housing inventories should jump by about 150,000 units, to 5.5 months of inventory, up from 5.0 months now.

Given the continued improving labor market, expect net new monthly job growth to average 185,000/month, which while down from 205,000/month in 2015, is excellent given the shrinking size of the working age population. As a result, the unemployment rate should fall from 5.0% today to between 4.6% and 4.8% by year end and possibly lower, depending upon the behavior of the labor force participation rate (LFPR). If the LFPR rises, and that would be good, unemployment may end the year as high as 4.8%, but if the LFPR continues to fall, an unemployment rate of 4.6% or even 4.5% is distinctly possible.

As for inflation, headline inflation will noticeably increase while core inflation (which excludes food and energy) edges up only slightly. Inflation should rise because energy and commodity prices are not likely to fall further and the dollar is unlikely to continue strengthening. As a result, the downward pressure these forces have exerted on headline inflation will cease and headline inflation, now at 0.3%, should move towards the core rate which is now at 1.3% and will probably rise to 1.7% by year end, which is still below the Fed target of 2%. As a result, the Federal Reserve will have the luxury of time to slowly raise the federal funds rate from where it is now, between 0.25% and 0.50%, to between 1.00% and 1.25% by year end, with a rate increase coming every three to four months

As a result of slightly faster GDP growth and falling unemployment in 2016, 10-year Treasuries will end the year at 2.75% and 30-year mortgage rates will probably hover around 4.5% as the yield curve flattens due to faster rising short-term rates. But slightly easing credit conditions and rising consumer spending due to improving employment numbers and wages will keep the economy and housing market on track despite mildly higher interest rates. Finally, I put the chances of a recession in 2016 at 15% to 20%. So look forward to steady economic activity in 2016 and fear not slowly ascending interest rates.

Elliot Eisenberg, Ph.D. is President of GraphsandLaughs, LLC and can be reached at Elliot@graphsandlaughs.net. His daily 70 word economics and policy blog can be seen at www.econ70.com.

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