Savannah Chamber

7 1 The National Outlook 2016 By Jeffrey M. Humphreys, Terry College of Business, University of Georgia www.selig.uga.edu Our national economic forecast indicates that the economic recovery will be sustained. The 2.5 percent rate of 2016 GDP growth will be slightly higher than last year's 2.3 percent, but well below the 2.9 percent average of the last 50 years. Three reasons why U.S. GDP growth will be higher in 2016 are slightly stronger spending by US consumers, slightly stronger spending by businesses for equipment and structures, and continued improvement in housing market conditions, The U.S. is well positioned for another year of modest economic growth courtesy of extensive restructuring of the private sector, including the cleanup of the financial sector, deleveraging by consumers, and a more favorable balance of supply and demand for residential and non-residential properties. State and local governments are positioned to contribute to growth because they have adjusted their spending and staffing to reflect their ability to generate revenue. Net exports will exert a smaller drag on U.S. GDP growth in 2016 than in 2015. Also, the overall impact of low commodity prices will help more than hurt the U.S. economy. With the year-over-year rate of GDP growth predicted at a below-average rate, the nation's economy will be vulnerable to economic shocks and/or policy mistakes. The three main risks to economic growth are: mistakes in U.S. fiscal or monetary policy; a sharper than expected slowdown in China's economic growth as it transitions to a growth model based on consumer spending rather than exports or investment spending; and financial panics and/or massive shifts in asset prices. The probability of recession is 25 percent, which is the same as the recession probability estimated at this time last year. In 2016, consumer spending, gross private domestic investment, and spending by state and local governments will contribute to GDP growth, while net exports and changes in private inventories will subtract from it. Sub-par productivity growth (although higher than in 2015) is another factor that will curb 2016 GDP growth. Spending by the federal government will be a neutral factor. Less positively, the Federal Reserve's monetary policy stance will become less simulative as it slowly raises short-term policy interest rates—the federal funds rate will reach 1 percent in December 2016. The inflation-adjusted federal fund rate therefore will still be less than zero—less stimulative, but hardly restrictive. Consumer Spending Consumers' inflation-adjusted contribution to GDP growth will be positive, but only slightly larger than in 2015. Continuing, but slower, job creation coupled with a limited wage and salary growth will help to repair household balance sheets. Improved labor and housing market conditions will give consumers the confidence to spend, but stock market turmoil negatively affects consumer confidence. Growth of disposable personal income will give consumers the wherewithal to spend. Credit will become more available, lowering one barrier to consumer spending. The 2016 gain in inflation-adjusted consumer spending therefore will be 2.7 percent. One reason why consumer spending will continue to grow is that household finances have improved substantially. Going into the recession, household finances were in terrible shape. American consumers were heavily indebted and very short on savings. A depressed household savings rate also reflected consumers' largess. Essentially, people opted to boost current spending by extracting more and more wealth from their homes— this, of course, was facilitated by lax credit standards. As households shifted their priorities from spending to savings, the savings rate has risen from its cyclical trough of only 2.2 percent in the third quarter of 2005 to 5.2 percent in 2015. It will hold steady at 5 percent (and not be a headwind) in 2016. But, over the long term, many will find that their level of savings will not be adequate to maintain current living standards in retirement. The household savings rate therefore needs to rise to 7 or 8 percent, which is quite attainable. This protracted period of household deleveraging has been painful, but it is also necessary. The statistics show that deleveraging is well advanced and will continue to be gradual rather than abrupt. One concern is that extreme volatility in the financial markets may cause jittery consumers to push up the household savings rate very sharply in 2016, which could precipitate a recession. Fortunately, that is not the very likely.

• Cover