2015-16 State of the Economy

December 17, 2015 By    
Photo: iStock.com/Palto

Photo: iStock.com/Palto

How will businesses fare in 2016? Very well, according to experienced marketplace watchers. After several years of gradual progress, the economic stars are aligning in favor of a more robust commercial environment.

“We expect 2016 will be a good year, with increased consumer spending driving economic growth,” says Sophia Koropeckyj, managing director of industry economics at Moody’s Analytics, a research firm based in West Chester, Pa.

Why the sunny outlook? Economists point to a number of conditions favoring businesses: higher employment, lower consumer debt, greater credit availability, trimmed gasoline prices, a more robust American economy. All should do their part to help encourage stronger growth over the coming 12 months.

The most important contributing factor to a more robust marketplace, Koropeckyj says, is the growing health of the labor force.

“Wage gains are now materializing across a number of industries and regions,” she says.

That means consumers, a critical driver of the American economy, will have more disposable cash to spend.

Moody’s says unemployment fell to 5.1 percent in late 2015, a full percentage-point decline over the level 12 months previous and a rate nearly synonymous with the 5 percent economists believe represents a condition of “full employment.”

“While there is still slack in the labor market, it is declining quickly,” says Scott Hoyt, senior director of consumer economics for Moody’s. “At some point in 2016, the labor market should become tight, which should translate into faster growth in wages and consumer spending.”

Indeed, Moody’s expects the nation to reach full employment by mid-2016, and it expects the average unemployment rate during the fourth quarter of the year to be 4.8 percent.

Gains in employment nationwide have helped create a population more confident of the future and, therefore, more prone to spend.

“The consumer has been feeling reasonably well,” says Walter Simson, principal of Chatham, N.J.-based Ventor Consulting. “Baby boomers, especially, are feeling not too bad.”

And economists expect consumer confidence to continue to rise over the coming 12 months in response to a brighter employment picture.

Stronger economy

So just how good is “good” for 2016? The answer depends on how much consumers and businesses spend nationwide on goods and services over the course of the year. The faster the rise in the gross domestic product (GDP), the healthier the economy.

For 2016, Moody’s expects GDP to grow 3.25 percent. That’s considerably higher than the expected 2015 rate of 2.5 percent (which is the American economy’s average historic growth rate over the years). The 2015 results, to be confirmed when the year’s sales numbers are finally tallied, were just slightly higher than 2014’s 2.43 percent growth rate.

An improving performance by large employers is expected to be a big driver in the GDP’s rise. Businesses of all sizes benefit when major corporations rack up healthy profits. Good earnings stimulate business expansion and an attendant investment in buildings and equipment. That generates still more business for suppliers, along with more employment and disposable income for consumers.

“Corporate profit growth is expected to accelerate some 9.2 percent through 2016,” Koropeckyj says.

That’s a considerable improvement over the results for 2015, when profits actually declined slightly as a result of the strong dollar (which weakened exports) and a decrease in energy revenues following a drop in commodity prices.

Why the rebound? Moody’s is looking to a recovery in global economies, along with a diminished drag from the dollar, to help turn things around. Several factors, though, could cause a delay.

“Our narrative rests on the assumption that wages and productivity will rise in lockstep,” Koropeckyj says. “But this may not hold. Productivity growth has been weak, allowing even modest wage gains to push unit labor costs higher.”

Wages are likely to grow faster than productivity.

“This would further compress margins and lower the outlook for corporate profits,” she says.

Making hay

Growth in the manufacturing sector is of special importance to all businesses.

Growth in the manufacturing sector is of special importance to all businesses.

The performance by one subset of the larger corporate world – that of manufacturers – is of special importance to all businesses.

Any growth in that sector has a dramatic effect on employment and thus on the economy in general because manufacturing is heavily dependent on a skilled labor force.

It seems that manufacturers are looking ahead to a 2016 that will match or exceed what has been a reasonably good 2015.
“Conditions are positive but are not robust or booming,” says Tom Palisin, executive director of The Manufacturers’ Association, a York, Pa.-based regional employers organization with more than 370 member companies. “Manufacturers are doing slightly better than they were a year ago. They are reporting low to moderate growth, solid orders and a good backlog.”

Low energy prices are favorable for the sector.

Looking to 2016, Palisin says his members are “cautiously optimistic.” A new initiative to bolster the workforce is a telling indicator of that optimism.

“One significant change is a move by many companies to invest more in their training budgets,” Palisin says.

Manufacturers are doing so, he says, in response to a number of conditions: an improving economy, several years of cost cutting that has led to a lean workforce and a lack of available skilled talent along with low unemployment.

“Employers now seem more eager to retain the employees they have by investing in training of their existing workforce,” he says.

That will translate into higher salaries and still more disposable income in consumers’ wallets.

Manufacturers will be helped by a growing availability of credit, which has loosened considerably since the tight years of the Great Recession.

“Rates are low and banks are willing to invest,” Palisin says. “However, there has not been much demand for commercial loans because many companies have sufficient cash on hand to finance their growth needs.”

Others, he says, have delayed capital investment due to economic uncertainty and a tough regulatory environment.

Housing rebound

Businesses depend on a healthy economy to support strong sales. And a robust housing construction sector, which employs more people and generates more disposable income, is one of the most important drivers of a healthy economy.

“The ever-tightening market for new homes will likely spur stronger construction activity in 2016,” Koropeckyj says.

Indeed, housing starts are expected to rise 29.5 percent for the year, a considerable improvement over the 14.5 percent figure expected for 2015 when final numbers are tallied. (The rate for 2014 was 5.8 percent.)

Why the spike in construction? The nation’s inventory of new homes has been falling steadily, Koropeckyj explains, to the point where builders are now expected to perceive solid economic benefits in gearing up into higher production.

The decline in inventory over the past year came about as builders held back from constructing new homes, concerned that consumer demand had not met expectations.

That demand, in turn, was soft because, Koropeckyj says, “many young families saddled with mountains of student debt were opting to continue renting.”

Granted, some conditions will have to be met before the housing rebound actually occurs.

“The tightening housing market by itself does not guarantee a resumption of single-family construction,” Koropeckyj says. “Household debt burdens will still have to fall significantly before the younger families that are potential buyers of new homes start to return to the market in strength. Even so, the U.S. recovery, with some outside help from low gasoline prices and consequently low inflation, is pulling that date forward.”

The expected housing rebound should have a related effect: a moderation in home prices. They are expected to increase by only 2.9 percent in 2016, a deceleration of the 6.3 percent expected for 2015.

Retail growth

Housing starts are expected to rise 29.5 percent in 2016 – a notable uptick from 2015. Photo: Propane Education & Research Council

Housing starts are expected to rise 29.5 percent in 2016 – a notable uptick from 2015. Photo: Propane Education & Research Council

Performance in the retail sector is another critical driver for the American economy. And here, again, economists see an improving picture.

“We expect core retail sales to grow 5.5 percent in 2016,” Hoyt says.

Core retail sales exclude volatile revenues from auto sales and gas stations. That expected increase is notably faster than the 4.2 percent growth rate anticipated when 2015 sales are finally tallied. The 2015 experience was, again, slightly better than the 3.9 percent growth of 2014.

If Moody’s is accurate in its 2016 forecast, businesses can rejoice, as the anticipated rate is not that far off the roughly 6 percent increases retailers commonly enjoyed during the robust 1990s, as well as the period businesses fondly remember just prior to the Great Recession.

So what will drive the anticipated retail sales increase? Primarily higher wages, fueled by the growing number of people gainfully employed.

Dark clouds

Challenges remain. Businesses should keep an eye out for further developments in lingering issues, such as the softening of the European and Chinese economies, a volatile American stock market and political gridlock in the nation’s capital.

“Businesses prefer stability and consistency,” Palisin says. “And right now, we have anything but that.”

Even so, signs point toward continued marketplace strength.

“We think the economy should weather the current uncertainties,” Hoyt says.

He points to improving employment figures as the key.

“A lot of our optimism centers on the strength in the labor markets,” he says.

A healthy jobs picture, then, should make all of the difference in 2016.

“Early in the year, businesses should watch what is happening with wages,” Hoyt explains. “If the labor market tightens as expected, that will lead to higher wages and more consumer spending.”

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