Three Thumbs Up, and Three Down, for U.S. Economy in 2016

While lower gas prices and a stronger U.S. dollar may sound like good news, PNC’s chief economist explains the potential downsides. These are among the ups and downs in what is expected to be a year of moderate economic growth.

For those economists who keep their fingers on the pulse of the U.S. and global economies like PNC Chief Economist Stuart Hoffman, Ph.D., they continuously track events and trends that can impact economic growth in a good or bad way – the upside risks and downside risks.

At the start of 2016, Hoffman highlights the potential ups and downs that will influence the U.S. economy in the new year:

Three Thumbs Down

1. Energy – In truth, the cost of energy – oil, gasoline and natural gas – is part of both the upside and the downside risks. The smiles cannot be overlooked as consumers fill up the gas tank these days with fading memories of more painful fill-ups at nearly $5 a gallon. But the negative impact is much broader.

The abundant global production and supply of oil that is driving down prices also puts a damper on output by U.S. gas/oil companies, natural gas production/exploration (i.e., Marcellus Shale) and ancillary companies that provide raw materials, supplies or services to energy companies.

2. Strong U.S. Dollar – Now that sounds like it should be a thumbs up, right? It is a positive sign regarding the health of the U.S. economy. But it hurts trade and takes a bite out of tourism.  For example, your strong U.S. dollars convert today into more pesos and euros, making international travel a bargain.

Conversely, fewer foreign tourists may be visiting “The Big Apple” or “Sin City” because their pesos and euros just don’t go as far in the United States. Plus, the growing trade deficit is of concern. One contributing factor is weak global growth. With a strong U.S. dollar, international consumers and businesses find it more costly to purchase U.S.-made goods and services, while anything produced outside the United States, like China, cost far less. Large corporations face challenges against their foreign competitors.

3. Stockpiles of Inventories – Product in the warehouse is costly, but considered to be a temporary situation because the demand for goods and services is high with American consumers confident about spending. However, current stockpiles coupled with a strong U.S. dollar keep inventories on economists’ watch lists. In fact, it was one of the few drags on the U.S. economy in the third quarter of 2015 (fourth quarter data was pending).

Three Thumbs Up

And now, on to the positive factors that will stimulate economic growth in 2016:

1. Salute to the American consumer! Let’s start with lower energy costs and those smiling consumers filling up their gas tanks. On average in 2015, lower energy costs collectively saved Americans about $100 billion. That’s some serious jingle in the pockets. PNC’s economists forecast gas prices to decline again in 2016, however, at a much lower rate, but still anticipated savings for consumers. 

With these savings, Americans have some choices to make - spend the money, save it or invest it. Add into the mix consumer confidence driven up by job growth and wage growth – finally! And then there are rising home prices, giving a boost to overall household wealth. During the dark days of the Great Recession and lingering long after, consumers put off major purchases. Take cars, for example. Currently, the one bright star of the manufacturing sector – the auto industry – may be one sign that more consumers are making those big purchases that were on hold until they felt better about spending again.

2. Housing Market/Home Sales – A recovery in the housing market is a big thumbs up. The multifamily sector – apartments and condos – was the first to recover after the financial crisis, but even sales of single-family homes are picking up again. The big question is why? Some of it can be attributed to job growth, wage growth and less money spent on oil, gas and natural gas.

The market is also experiencing an increase in new households being created. In other words, adult children, who were still living with parents during the financial crisis, are flying away from the nest once again. Anyone shopping for a house lately has been watching home prices go up and up. Remember all of those homeowners “under water” – the ones who owed more on the mortgage than the house was worth during the height of the Great Recession? It’s good news for them too as home values are finally on the rise, causing the “under water” mortgage levels to decline or even disappear.

3. Construction – New home construction continues on the upswing, and crosses over into other real estate sectors as well. This includes retail stores, office buildings, hotels and some industrial construction. In addition, the federal government is expected to pass a new highway bill that will fuel construction for roads and infrastructure for the next five or six years. New construction drives up job growth, which causes more consumers to spend and ultimately stimulates economic growth.

PNC’s 2016 Outlook

PNC’s economists forecast “moderate” economic growth in the United States in 2016 at about a 2-2.5 percent increase in gross domestic product, or GDP. At the same time, inflation will remain low, driven in large part by lower energy costs. PNC believes the Federal Reserve will continue to take only “baby steps” in raising rates in 2016, forecasting three small rate hikes of 0.25 percent each next year.

Stu Hoffman says a strong U.S. dollar is
positive and negative for the economy

The missing piece of the recovery – wage growth – has finally returned, giving consumers confidence to begin spending again, especially on those big-ticket item purchases they’ve put off since the recession.