Monday, January 11, 2016

Question #1 for 2016: How much will the economy grow in 2016?

by Bill McBride on 1/11/2016 02:19:00 PM

Earlier I posted some questions for next year: Ten Economic Questions for 2016. I'm adding some thoughts, and a few predictions for each question.

Here is a review of the Ten Economic Questions for 2015.

1) Economic growth: Heading into 2016, most analysts are once again pretty sanguine. Even with weak growth in the first quarter, 2015 was a decent year (GDP growth will be around 2.5% in 2015). Right now analysts are expecting growth of 2.6% in 2016, although a few analysts are projecting a recession. How much will the economy grow in 2016?

First, there are several analysts predicting a recession in 2016, see: The Endless Parade of Recession Calls. No one has a perfect crystal ball, but I'm not even on recession watch right now. In 2007, when I correctly predicted a recession, I was watching the impact of the housing bust on the economy - and that recession call seemed obvious (although it was out of the consensus). A recession in 2016 seems very unlikely.

Second, here is a table of the annual change in real GDP since  2007.  Economic activity has mostly been in the 2% range since 2010.  Given current demographics, that is about what we'd expect: See: 2% is the new 4%.  It is possible with some boost related to lower oil prices (something that is hard to see in the data, but is certainly happening in some sectors), and some boost from government spending in 2016 - and maybe some help from the weather in Q1 - perhaps we will finally see growth at 3% this year.


Annual Real GDP Growth
YearGDP
20053.3%
20062.7%
20071.8%
2008-0.3%
2009-2.8%
20102.5%
20111.6%
20122.2%
20131.5%
20142.4%
201512.5%
1 2015 estimate.


The good news is that all of the positives that led to the pickup in activity since 2013 are still present - the housing recovery is ongoing, state and local government austerity is over (and now Federal austerity is over), household balance sheets are in much better shape and household deleveraging is over, and commercial real estate (CRE) investment (ex-energy) and public construction will both probably make further positive contributions in 2016.

In addition, the sharp decline in oil prices should be a net positive for the US economy in 2016.  And, hopefully, the negative impact from the strong dollar will fade in 2016.

The most likely growth rate is in the mid-2% range again, however a 3 handle is possible if PCE picks up a little more (ex-gasoline).

Here are the Ten Economic Questions for 2016 and a few predictions:

Question #1 for 2016: How much will the economy grow in 2016?
Question #2 for 2016: How many payroll jobs will be added in 2016?
Question #3 for 2016: What will the unemployment rate be in December 2016?
Question #4 for 2016: Will the core inflation rate rise in 2016? Will too much inflation be a concern in 2016?
Question #5 for 2016: Will the Fed raise rates in 2016, and if so, by how much?
Question #6 for 2016: Will real wages increase in 2016?
Question #7 for 2016: What about oil prices in 2016?
Question #8 for 2016: How much will Residential Investment increase?
Question #9 for 2016: What will happen with house prices in 2016?
Question #10 for 2016: How much will housing inventory increase in 2016?