Savannah Chamber

10 4 Office and retail vacancy rates will remain elevated, but will improve. Demand for new office space will increase the most in markets that benefit from growth of the high technology and health care industries. Retail construction will continue to be limited by abundant supplies of existing space as well as online competition, but pockets of new retail development will appear in the most desirable locations. Industrial development will continue to benefit from rising levels of industrial production and capacity utilization, with new development focused on locations with logistical advantages. Spending for publicly funded buildings will increase, reversing the downtrend of recent years, now that property tax bases are beginning to respond to the upturn in home prices. Business Spending The sharp drop in oil prices undercut nonresidential fixed investment spending by businesses in 2015, but such spending probably bottomed out and should not drop further in 2016. Due to slightly faster growth in end markets and corporate profits, the year-over-year percentage increases in business spending for equipment will be larger than in 2015. Spending will grow twice as fast as GDP, reflecting the need to replace equipment, to improve productivity, and to become less labor intensive. Investment spending by small businesses should grow more rapidly due to better access to credit. By historical standards, businesses' capital spending has been very weak, so there is a pressing need to increase spending on nonresidential fixed investment. The capital stock is getting quite old: the age of nonresidential fixed assets across all private industries is at its highest level in 40 years. In recent years, businesses have spent aggressively on stock buybacks and acquisitions, but not so much on equipment and other forms of capital. Investments have been delayed for so long that replacement needs should boost capital spending in 2016. Business spending for computers and communications equipment will post the largest year-over-year percentage gains. Substantially higher spending also is expected for industrial equipment as well as other miscellaneous equipment. Spending for transportation equipment will increase only slightly. Below-average levels of capacity utilization will be a mild headwind for business spending for equipment and software. The economy is not quite at the point where strong GDP growth generates more GDP growth because inadequate capacity begins to encourage more capital spending. But if much of the excess capacity is either in the wrong location or in the wrong industry, then the push to GDP growth could be larger than expected. The rate of capacity utilization in all industries was 78.4 percent in mid- 2015, which is up considerably from 66.9 percent in mid-2009. The long-run (1972-2014) average rate of capacity utilization for all industries in the U.S. is 80.1 percent, however. Of course, capacity utilization varies dramatically by industry. In mid-2015, capacity utilization for industries producing goods at the finished stage was 77.5 percent, a rate that's 0.4 percent above its long- run average and therefore should spur capacity additions. In contrast, capacity utilization for industries producing crude products was only 83.3 percent, or 3 percent below its long-run average. Capacity utilization for goods at the primary and semi-finished stages of production was only 77.2 percent, or 3.6 percent below its long-run average. Corporate Profits Our forecast does not expect the pace of U.S. GDP growth to accelerate very much in 2016, which implies only modest growth in domestically generated corporate profits. Also, remember that after-tax corporate profits are already very high, so businesses should eke out low- to mid-single digit percentage gains in profits in 2016. Excellent expense management and more broad- based—but moderate—growth in demand for goods and services will be the primary factors supporting profit growth. Financing also should be somewhat easier to obtain, although slightly more expensive. The upturn in the housing market will be the primary factor contributing to the broadening of the base of profit growth. The upturn in housing markets will generate profits for many home-related industries. Growth in spending for business equipment bodes well for profits earned by technology-oriented companies. Productivity growth is likely to be slightly stronger in 2016 than it was in 2015, which is a panacea for profits as well as the overall economy. On the negative side, the year-over-year comparisons will be extremely tough to beat. Businesses' pricing power is not expected to firm significantly. The strong dollar will limit profit growth based on overseas earnings. Finally, it's important to recognize that financial institutions' profit margins will be sensitive to problems stemming from Europe's sovereign debt crisis. Indeed, the slow expansion of foreign GDP—especially the lackluster performance of the EU—will limit sales prospects for many export-oriented companies. International Trade In 2016, both real exports and imports are expected to grow faster than U.S. GDP, reflecting the ongoing globalization of input and product markets. Imports will rise faster than exports, but the trade gap will be smaller than in 2015, so net exports will be a

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