Economic Forecast for 2016:
Much Like 2015, but Construction
By Elliot Eisenberg, Ph.D., GraphsandLaughs, LLC
While 2016 has begun with a resounding thud, a recession is unlikely. Although industrial production, corporate profits and the stock market are all down, the declines can be traced largely to falling oil prices and reduced energy exploration activity, as opposed to an economy-wide slowdown. Moreover, consumer confidence remains solid, and the job market remains strong. As a result, households will power the economy forward, due to not only improving employment but also slightly rising incomes. By contrast, mining, energy, agriculture and export-focused manufacturing will all be weak due to falling commodity prices and a strong U.S. dollar. Although bad news on the Chinese economy continues to dominate headlines, China has been slowing for years, and its continued weakening is unlikely to strongly impact the U.S. economy as exports to China are just 1% of gross domestic product (GDP).
With this in mind, 2016 GDP will probably grow by about 2.4%, up slightly, and unemployment will likely decline from 5% today to about 4.7% by year end and, in the process, will push up wage growth. Inflation will hopefully rise from 0.4% today to 1.1% by the end of the year but will remain very much in check. As for short-term interest rates, the Federal Reserve Board will raise rates very slowly and only as fast as our slow-growing economy will tolerate. Expect short-term rates to rise by, at most, three-quarters of one percentage point, while longer dated 10-year Treasuries and 30-year mortgage rates will rise by, at most, half as much.
Turning our attention to residential construction activity, housing starts should rise by about 12%, with total starts reaching 1.24 million in 2016. In 2016, single-family starts should total 815,000, up from 714,000, a rise of roughly 14%, while multifamily starts should rise to 425,000, up from 405,000, a rise of 5%. For the last several years, multifamily construction has been performing exceptionally well, but rising household formation and continuing solid job growth have finally created conditions that should boost single-family activity. Moreover, rising home prices and a lack of inventory give home builders added incentive to build.
As for service and repair/remodeling activity, the National Association of Home Builders (NAHB) remodeling index has consistently been between 56 and 59 for the last 18 months, its best showing in 15 years. The Leading Indicator of Remodeling Activity put out by the Joint Center for Housing Studies at Harvard shows residential remodeling growth rising from 4.4% in Q1 2016 to 6.8% in Q2 on the back of continued rising house prices and existing home sales.
Before looking at the details, for 2015 as a whole, total construction starts climbed 8%. This continues the pattern of moderate expansion in total construction activity reported during the previous three years – up 12% in 2012; up 11% in 2013; and up 9% in 2014.
Commercial construction activity received a strong boost from spending on lodging, which was up 15% compared to last year and will remain strong in 2016, as 2015 was the best year for hotel bookings and occupancy ever. Retail rose by 3%, spending on new office space fell slightly following a strong 2014, while spending on warehouses rose. By contrast, spending on amusement, office space and labs were down. Overall, commercial spending was flat in 2015.
Spending on new manufacturing facilities was down after an outstanding 2014. On the institutional side, while overall spending fell slightly, spending on religious buildings, nursing homes/assisted living facilities, police/courthouse/prisons, and miscellaneous government was up, while spending on hospitals/clinics, libraries/museums and military facilities was down. Collectively, total spending on these categories should rise slightly in 2016.
The availability of skilled workers continues to be a major concern in the construction trades. Surveys of business executives repeatedly find that fears of finding sufficient skilled labor are growing. A recent National Federation of Independent Business’ monthly survey of its members showed 15% consider finding enough skilled labor to be problem number one, a concern that has been steadily rising for years. Many employers believe the shortage of craft workers to be an ongoing generational challenge.
In summary, despite a dismal start, 2016 should be okay, led by household spending resulting from solid employment gains and continued growth in household formations. Interest rates will probably rise, but the Fed will be very cautious and raise rates very slowly so as not to derail the economy. A bit of a wild card is the presidential election, which may dampen corporate investment if the polls are close and the nominees are politically far apart. Lastly, the likelihood of a recession is a low 23%.
Elliot Eisenberg, Ph.D., is president of GraphsandLaughs, LLC and can be reached at Elliot@graphsandlaughs.net. His daily 70-word economics and policy blog can be seen at www.econ70.com.
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