Savannah Chamber

8 2 Recently, turmoil in the stock market reduced financial equity wealth and lowered consumer confidence, but real estate wealth— which tends to have a larger influence on overall consumer spending—continued to increase. Changes in equity-based wealth have a significant influence on spending for luxury items, however. At this juncture, job creation—and the income growth that accompanies it—is absolutely vital to the outlook for both consumer spending and the overall economy. The forecast anticipates that the nation's job machine will drop into second gear in 2016, however. Job growth therefore will be adequate to support 2.5 percent GDP growth, but inadequate to raise the rate of GDP growth above its long-term average of 2.9 percent. Growth in the number of jobs and the number of hours worked per job are will support this income growth. As employment expands in construction, health care, manufacturing, and professional and business services, the proportion of high paying jobs created also is likely to rise. Low productivity growth will prevent wages from rising very rapidly, however. Also, the labor force participation rate will rise slightly, albeit from a very depressed level. Consumer spending is likely to broaden slightly, with spending for durable goods increasing faster than spending for nondurable goods and services. Among durables, outlays for information processing equipment and motor vehicles will increase very rapidly. Outlays for recreational goods also will grow quickly. Improving housing market conditions will underpin sales of furniture and durable household equipment. Spending on nondurables such as pharmaceuticals and other medical products will rise briskly, but spending for food, clothing, and shoes will rise moderately. Among services, spending on vehicle leasing will increase the fastest. Providers of health care and food services will see above-average growth in spending. Consumers' outlays for utilities will grow relatively slowly, however, and spending on luxury goods will drop. Labor Markets On an annual average basis, total nonfarm employment will increase by 1.4 percent in 2016, which is less than the 2 percent gain estimated for 2015. Courtesy of the upturn in housing, job growth will be very broadly based. Companies will hire as domestic demand for goods and services expands. Venture capital—which fuels job creation—will be more available. Also, most businesses are leanly staffed, so the rate of job loss in the private sector will be quite low. Thus, 2.5 percent GDP growth therefore will generate 1.4 percent job growth. Also, GDP growth will outpace productivity growth in 2016, which will push firms to hire additional staff as end markets expand. Expectations of below- average top-line growth, the tightening labor market, and productivity gains will be factors behind the slowdown in job growth. Weak global demand for U.S. exports also will restrain domestic job growth. More positively, a larger share of the new jobs will be full-time rather than part-time. Assuming that the labor force participation increases only slightly, net job creation will reduce the unemployment rate from 5.3 percent to 5 percent on an annual average basis. As the labor market tightens, wage growth will accelerate, but low productivity growth will prevent wages from rising very rapidly. Wages and benefits will rise by 2.4 percent. Health insurance costs will be the primary force behind benefit cost increases. Unit labor costs will rise about 2 percent. One implication of the slow growth of wages and unit labor costs is that the Federal Reserve does not need to raise short-term policy interest rates very quickly. Although net hiring will expand, several factors will limit the gains. First, below- average GDP growth limits the impetus to hire. Second, a slight pickup in productivity will slow job growth. Third, the outsourcing of American jobs to developing countries will continue to spread from blue-collar occupations in manufacturing to white-collar occupations in high tech and service industries. Fourth, a proposed new federal regulation will require employers pay overtime to all workers who make less than $50,400. Fifth, the federal government will be downsizing its workforces permanently. Finally, some of the new jobs that businesses must create will not match the skills of the unemployed. Fortunately, structural unemployment stemming from labor force immobility will diminish as housing markets improve. But structural unemployment due to the skills mismatch is unlikely to diminish and probably will worsen due to recent cuts in spending by many state and local government for K-12 as well as adult/technical education and training. In the coming year, construction companies will post the fastest rate of employment growth. Professional and business services will see the second fastest rate of job growth. Transportation and warehousing will see the fourth fastest rate. The education, health services, leisure and hospitality, wholesale trade, and state and local government subsectors also will see solid employment gains. Providers of financial activities are not expected to gain or lose significant numbers of jobs, but within this broad sector, banks will cut jobs even as insurance, real estate, and rental leasing companies add positions. Mining, the federal government, and utilities are the only major sectors expected to shed jobs. U.S. manufacturers will continue to hire, but at a much slower pace than in 2015. Continued gains in manufacturing employment reflect cyclical factors such as growing demand for durable goods. Durable goods manufacturing subsectors with the best

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