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Friday, April 08, 2016

Q1 Review: Ten Economic Questions for 2016

by Calculated Risk on 4/08/2016 11:59:00 AM

At the end of last year, I posted Ten Economic Questions for 2016. I followed up with a brief post on each question. The goal was to provide an overview of what I expected in 2016 (I don't have a crystal ball, but I think it helps to outline what I think will happen - and understand - and change my mind, when the outlook is wrong).

By request, here is a quick Q1 review (it is very early in the year). I've linked to my posts from the beginning of the year, with a brief excerpt and a few comments:

10) Question #10 for 2016: How much will housing inventory increase in 2016?

Right now my guess is active inventory will increase in 2016 (inventory will decline seasonally in December and January, but I expect to see inventory up again year-over-year in 2016). I don't expect a double digit surge in inventory, but maybe a mid-single digit increase year-over-year.  If correct, this will keep house price increases down in  2015 (probably lower than the 5% or so gains in 2014 and 2015).
According to the February NAR report on existing home sales, inventory was down 1.1% year-over-year in February, and the months-of-supply was at 4.4 months.  I still expect inventory to increase in 2016.

9) Question #9 for 2016: What will happen with house prices in 2016?
Low inventories, and a decent economy suggests further price increases in 2016. However I expect we will see prices up less in 2016, than in 2015, as measured by these house price indexes - mostly because I expect more inventory.
If is very early, but the CoreLogic data released this week showed prices up 6.8% year-over-year in February.  The CoreLogic year-over-year increase is higher than last year so far.

8) Question #8 for 2016: How much will Residential Investment increase?
My guess is growth of around 4% to 8% in 2016 for new home sales, and about the same percentage growth for housing starts. Also I think the mix between multi-family and single family starts will shift a little more towards single family in 2016.
Through February, starts were up 15% year-over-year compared to the same period in 2015 (easy comparison).  New home sales were down 4% year-over-year (more difficult comparison).

7) Question #7 for 2016: What about oil prices in 2016?
It is impossible to predict an international supply disruption, however if a significant disruption happens, then prices will move higher. Continued weakness in Europe and China seems likely, however sluggish demand will be somewhat offset by less tight oil production. It seems like the key oil producers (Saudi, etc) will continue production at current levels. This suggests in the short run (2016) that prices will stay low, but probably move up a little in 2016. I'll guess WTI will be up from the current price [WTI at $38 per barrel] by December 2016 (but still under $50 per barrel).
As of this morning, WTI futures are just over $39 per barrel.

6) Question #6 for 2016: Will real wages increase in 2016?
For this post the key point is that nominal wages have been only increasing about 2% per year with some pickup in 2015. As the labor market continues to tighten, we should start see more wage pressure as companies have to compete more for employees. I expect to see some further increase in nominal wage increases in 2016 (perhaps over 3% later in the year). The year-over-year change in real wages will depend on inflation, and I expect headline CPI to pickup some this year as the impact on headline inflation of declining oil prices fades.
Through March 2016, nominal hourly wages were up 2.3% year-over-year. This is a pickup from last year, and so far it appears wages will increase at a faster rate in 2016.

5) Question #5 for 2016: Will the Fed raise rates in 2016, and if so, by how much?
I've seen several people arguing the Fed will be cutting rates by the end of 2016 - I think that is unlikely. Instead I think the Fed will be cautious - and they will not want to reverse course. Right now I think something around three rate hikes in 2016 is likely.
So far zero is correct, but I still expect the FOMC to raise rates a little this year.

4) Question #4 for 2016: Will the core inflation rate rise in 2016? Will too much inflation be a concern in 2016?
Due to some remaining slack in the labor market (example: elevated level of part time workers for economic reasons), I expect these measures of inflation will be close to the Fed's target in 2016.

So currently I think core inflation (year-over-year) will increase further in 2016, but too much inflation will not be a serious concern in 2016.
It is early, but inflation has moved up close to the Fed target through February.

3) Question #3 for 2016: What will the unemployment rate be in December 2016?
Depending on the estimate for the participation rate and job growth (next question), it appears the unemployment rate will decline to around 4.5% by December 2016. My guess is based on the participation rate declining slightly in 2016 and for decent job growth in 2016 (however less in 2016 than in 2015).
The participation rate increased from 62.7% in December to 63.0% in March, and the unemployment rate was 5.0% in March, unchanged from 5.0% in December.  I don't expect the surge in the participation rate to continue, and I still expect the unemployment rate to decline into the mid-4s.

2) Question #2 for 2016: How many payroll jobs will be added in 2016?
Energy related construction hiring will decline in 2016, but I expect other areas of construction to be solid. For manufacturing, growth in the auto sector will probably slow this year, but the drag on manufacturing employment from the strong dollar should be less in 2016.

As I mentioned above, in addition to layoffs in the energy sector, exporters will have a difficult year - but probably not the severe contraction as in 2015, and more companies will have difficulty finding qualified candidates. Even with some boost from lower oil prices - and some additional public hiring, I expect total jobs added to be lower in 2016 than in 2015.

So my forecast is for gains of around 200,000 payroll jobs per month in 2015. Lower than in 2015, but another solid year for employment gains given current demographics.
Through March 2016, the economy has added 628,000 thousand jobs; 209,000 per month.  I still expect employment gains to average around 200,000 per month in 2016 (lower than in 2014 and 2015, but still solid).

1) Question #1 for 2016: How much will the economy grow 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 ...
Once again, GDP will be sluggish in Q1 (near zero growth).

It is very early in the year.  Currently it looks like 2016 is unfolding somewhat as expected - although I'd revise down my forecast for FOMC rate hikes from 3 to 2.  As far as the economic data, it is about as expected.