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What to Expect in the New Year

With 2015 in the books, let’s turn to 2016 and take a look at a few of the things I’m expecting in the year ahead.

We enter the New Year with downside risks that have receded somewhat, but remain pronounced. The sharp decline in global equities this past summer, rising concerns of a severe slowdown in China and other emerging markets that would precipitate a global slowdown, and the rising value of the dollar were all downside risks to economic growth in the back half of 2015. While somewhat muted, as we enter 2016, these risks remain intact.

Global Economies

Global economies remain unsettled. China remains of core concern, but broad concern over a global economic slowdown has put downward pressure on commodity prices which in turn has placed significant downward pressure on other emerging countries. A climbing dollar puts inflation further from the target.

Domestic Fundamentals

Despite headwinds abroad, fundamentals for U.S. growth remain in place. Risk appetites have improved over the last few years which should help drive the type of activities that spur economic growth. Lower risk spreads, improving credit terms and willingness to lend, should help drive business investment and durable asset purchases. Households have enjoyed increases in equity and home prices at the same time debt levels have been reduced.

Consumer Health

Key to growth over the next year is the health of the consumer. There are a number of key strengths we should benefit from. Employment gains coupled with the firming growth of labor compensation is driving real labor income. The unemployment rate will drift towards 4.5 percent by the end of the year. Consumers are still benefiting from the continued pass-through of declining energy prices. And there appear to be some wealth effects that haven’t yet fully passed through to higher consumer spending. Consumer spending has averaged close to three percent over the last few years and this momentum should continue into 2016.

Overall, I expect the economic landscape to improve in 2016 driven by some of the factors outlined above. After growing roughly 2.1 percent in 2015, I expect economic growth to accelerate modestly to 2.7 percent in 2016. The Fed will begin to modestly increase the target federal funds rate in an effort to normalize the interest rate environment. I expect them to take slow, measured steps throughout 2016 and the immediate impact will be minimal outside of some interest-rate sensitive segments of the economy.

Shawn DuBravac, Ph.D., Staff Economist, Consumer Technology Association