Economic Outlook Shows Continued Slow Growth in 2016

LAS VEGAS -- The economy is expected to continue to expand at a pace slightly above trends for 2016, according to Bill Strauss, senior economist and economic advisor, Federal Reserve Bank of Chicago. Speaking in Las Vegas at Heavy Duty Aftermarket Dialogue Monday, Strauss talked about a number of factors affecting the economy and offered his thoughts on what we can expect for the year ahead.

Since the Great Recession, he said, the gross domestic product has expanded by 2.1%. The Federal Open Market Committee expects this slow growth to continue with predictions of 2.3% to 2.5% percent growth for 2016 and 2.0% to 2.3% growth for 2017. Longer term the committee sees GDP at 1.8% to 2.2%.

Strauss said there have been two shocks to the economy. One is the collapse of the energy market; the second is the strength of the U.S. dollar. The dollar is up 17%. “This makes exported U.S. goods much more expensive and caused the trade deficit to increase,” he says.

The surge in the value of the U.S. dollar “had little to do with what happened in the U.S.,” Strauss says, and instead “was the result of many other countries reorganizing their policy prescriptions.”

There is a great deal of uncertainty about the ramifications of the slowdown of the Chinese market, Strauss acknowledged, but noted that even though China is our third largest export partner, it still accounts for only 7% of our exports.

Strauss also provided information from a survey of 50 professional forecasters about economic growth in various countries. This Blue Chip International Consensus Forecast projects real GDP growth in the U.S. of 2.5 % for 2016 and 2017. However, the news was less robust for places like Brazil and Russia. The group forecast that Brazil’s GDP will be down 2.4% this year and up only 1.1% in 2017. Russia’s GDP is expected to drop by 0.4% in 2016 but up 1.7% in 2017. The GDP of China is expected to slow from the 6.9% rate of 2015 to 6.2% by 2017.

Industrial production is forecast to improve this year and grow to just below its historic rate.

Despite employment growing by 2.65 million jobs in 2015 and an unemployment rate of 5%, Strauss said we have not seen the upward pressure on wages that would normally accompany unemployment levels this low. FOMC indicates that the current unemployment rate is close to the natural rate. Strauss expects employment to rise moderately with the unemployment rate edging lower.

Speaking about the recent interest rate hike by the Federal Reserve, Strauss noted this is the only time the Fed has started an interest rate hike in December. He explained the Fed has one goal, and that is to focus on the U.S. market, “but what happens around the world impacts our economy, so the Fed has to take that into account” when making decisions.

Strauss expects the Federal Fund rate to remain below the neutral through 2018. “The Fed is not putting the foot on the brakes, but rather is taking it off the accelerator.”