U.S. Economic Outlook: 2016 & Beyond

The U.S. economic outlook is healthy. The GDP growth rate will remain within the 2-3 percent ideal range. Unemployment will continue at the natural rate. There isn’t too much inflation or deflation. That’s nearly a Goldilocks economy. There’s little risk of the irrational exuberance that creates damaging booms and busts.
The biggest shift heading into 2016 is the increase in U.S. shale oil production.
That reduced oil prices 25 percent in 2014 and 2015. The good news for the economy is that it also lowered the cost of transportation, food and raw materials for business, raising profit margins. It gives consumers more disposable income to spend. The bad news is that both are increasing cash reserves instead of spending.
U.S. GDP growth will improve in 2016 to 2.4 percent. The economy will rebound after 2015’s growth rate of 2.1 percent. The increase in Gross Domestic Product will slow to 2.2 percent in 2017, and 2.0 percent in 2018. That’s according to the FOMC meeting forecast released December 16, 2015.
U.S. manufacturing is forecast to increase faster than the general economy.
Production will grow 2.6 percent in 2016, 3.0 percent in 2017 and 2.8 percent in 2018. Growth will slow to 2.6 percent in 2019 and 2.0 percent in 2020.
The unemployment rate will be 4.7 percent in 2016, 2017 and 2018. That’s lower than the 5.0 percent rate in 2015, and the Fed’s 6.7 percent target. Most job growth is in low-paying retail and food service industries. Many people have been out of work for so long that they’ll never be able to return to the high-paying jobs they used to have.
That means structural unemployment increased. Federal Reserve Chair Janet Yellen admits a lot of workers are part-time and would prefer full-time work. That makes the unemployment rate seem artificially low. She considers the real unemployment rate to be more accurate. That rate is usually double the official rate.
Inflation will be 1.6 percent in 2016, 1.9 percent in 2017 and 2.0 percent in 2018. All are higher the 0.7 percent inflation experienced in 2015 caused by low oil prices. The core inflation rate (without gas or food prices) will be 1.6 percent in 2016, 1.9 percent in 2017 and 2.0 percent in 2018. All are below the Fed’s 2.0 percent target inflation rate and the 2.1 percent core inflation in 2015.
Interest Rate Outlook
The FOMC raised the Fed funds rate to 0.5 percent in December 2015. It will gradually raise interest rates through 2016. The Fed funds rate controls short-term interest rates, such as banks’ prime rate, LIBOR, adjustable-rate and interest-only loans, and credit card rates. For more, see FCurrent Fed funds rate.
The Fed said it would roll over the $4 trillion in Treasuries after the Fed funds rate has normalized. The Fed acquired the securities during quantitative easing, which ended in 2014. When it does start selling them, there will be more supply. That should raise the yield on the 10-year Treasury note. That drives up long-term interest rates, such as fixed-rate mortgages and corporate bonds. However, Treasury yields also depend on demand for the dollar. If demand is high, yields will drop, and vice-versa. As the global economy remains uncertain, demand for this ultra-safe investment is remaining strong. Nevertheless, long-term and fixed interest rates should still rise in 2016 and beyond.
Employment Outlook
The Bureau of Labor Statistics publishes an outlook for U.S. employment each decade. It goes into great detail about each industry and occupation. Overall, the BLS expects total employment to increase by 20.5 million jobs from 2010-2020. While 88 percent of all occupations will experience growth, the fastest growth will occur in healthcare, personal care and social assistance, and construction. Furthermore, jobs requiring a master’s degree will grow the fastest while those that only need a high school diploma will grow the slowest. (Source: BLS Occupational Outlook Summary)
The BLS assumes that the economy will fully recover from the recession by 2020 and that the labor force will return to full employment or an unemployment rate between 4-5 percent. The biggest growth (5.7 million jobs) will occur in healthcare and other forms of social assistance as the American population ages.
The next largest increase (2.1 million jobs) will occur in professional and technical occupations. Most of this is in computer systems design, especially mobile technologies, and management, scientific and technical consulting. Businesses will need advice on planning and logistics, implementing new technologies, and complying with workplace safety, environmental, and employment regulations.
Other substantial increases will occur in education (1.8 million jobs), retail (1.7 million jobs) and hotel/restaurants (1 million jobs). Another area is miscellaneous services (1.6 million jobs). That includes human resources, seasonal and temporary workers, and waste collection.
As housing recovers, construction will add 1.8 million jobs while other areas of manufacturing will lose jobs due to technology and outsourcing. For more detail, see BLS Outlook on Employment.
More 2016 Forecasts
The Stock Market Will Set New Highs —
The Dow set its record on May 19, 2015, closing 18,312.39. It then nearly fell 10 percent, bouncing back in the autumn, only to drop 10.7 percent in the first two weeks of January. That stock market correction may give it the strength to set a new record in 2016. It may trade sideways for the first six months of 2016 before moving higher again by the end of the year.
The Housing Market Will Strengthen — Home prices will rise at a much slower rate. That’s because interest rates will creep up, lowering demand. Home builders are on tap to add many more new structures, increasing supply. If you’re thinking of selling your home or moving, just go ahead and make your decision. Don’t wait for the market to improve, it isn’t going to get much better…or much worse.
The Fed Will Gradually Raise the Fed Funds Rate — Although the Fed will keep rolling over its $4 trillion in securities when they come due. That maintains additional liquidity in the banking system, but could be one reason Treasury rates remain so low.
Gas Prices Will Creep Up a Bit in the Spring — High gas prices usually occur every spring. Last year it happened in January, the year before in February, and in March in prior years. However, they typically drop by April. This year, the U.S. is producing so much shale oil, it’s unlikely we’ll see much more than a slight uptick. For more, see How to Predict Tomorrow’s Gas Prices Today.
Congress Might Actually Help the Economy — Now that Paul Ryan is Speaker of the House, and Republicans are a majority in both the Senate and House, the party may pull together to support the economy. Voters may blame a do-nothing Congress if the economy falters. From 2011 through 2013, Congress slowed economic growth when tea party Republicans threatened government shutdowns and debt defaults.
The Strong Dollar May Reverse Course —
Forex traders have driven up the strength of the dollar 25 percent because of expected higher U.S. interest rates. However, that’s hurt U.S. exports, lowered commodity prices and slowed growth in many emerging markets. That’s because three out of four BRICS, Brazil, Russia and China, depend on exports. Brazil is being hurt by lower commodities prices (and bad politics.) Russia is suffering from lower oil prices (and sanctions from bad politics.) China’s economic growth depended on its dollar currency peg. That hurt its export prices when the dollar rose (and so did bad politics.) It may reverse course in 2016 when traders realize the Fed isn’t raising rates that quickly.
How It Affects You
2016 will be a prosperous year as we continue to say goodbye to the effects of the financial crisis. Be on the lookout for irrational exuberance in the stock market this year. Although we aren’t there yet, that usually signals the peak of the business cycle. However, another recession is probably two-three years out. That’s because this recovery has been so slow that it will take longer to reach the peak.
Therefore, the best thing to do this year is to stay relentlessly focused on your financial well-being. Continue to improve your skills and chart a clear course for your career. If you’ve invested in the stock market, be calm during this pull-back. Plummeting commodity prices, including gold, oil, and coffee, will return to the mean. All in all, a good time to reduce debt, build up your savings and increase your wealth.
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