i3 - January/February 2016 - 98

Business

BY SHAWN G. DUBRAVAC, PHD, CFA

T H E EC O N O M I ST
SIX TAILWINDS
HELPING
CONSUMERS IN 2016

WHAT TO
EXPECT
FROM

Improvement in employment dynamics

2016

Increasing incomes
Pass through wealth
effects from lower energy
prices
Positive wealth effects
from equity market and
real estate appreciation

Increasing risk appetite

With 2015 in the books, let's turn to
2016 and take a look at a few of the
things I'm expecting in the year ahead.

terms and willingness to lend, should help drive business
investment and durable asset purchases. Households have
enjoyed increases in equity and home prices at the same
time debt levels have been reduced.

We enter the New Year with downside risks that have
receded somewhat, but remain pronounced. The sharp
decline in global equities this past summer, rising concerns
of a severe slowdown in China and other emerging markets
that would precipitate a global slowdown, and the rising
value of the dollar were all downside risks to economic
growth in the back half of 2015. While somewhat muted,
as we enter 2016, these risks remain intact.

CONSUMER HEALTH
Key to growth over the next year is the health of the
consumer. There are a number of key strengths we should
benefit from. Employment gains coupled with the firming
growth of labor compensation is driving real labor income.
The unemployment rate will drift towards 4.5 percent by the
end of the year. Consumers are still benefiting from the continued pass-through of declining energy prices. And there
appear to be some wealth effects that haven't yet fully passed
through to higher consumer spending. Consumer spending
has averaged close to three percent over the last few years
and this momentum should continue into 2016.
Overall, I expect the economic landscape to improve in
2016 driven by some of the factors outlined above. After
growing roughly 2.1 percent in 2015, I expect economic
growth to accelerate modestly to 2.7 percent in 2016. The
Fed will begin to modestly increase the target federal funds
rate in an effort to normalize the interest rate environment.
I expect them to take slow, measured steps throughout 2016
and the immediate impact will be minimal outside of some
interest-rate sensitive segments of the economy.

GLOBAL ECONOMIES
Global economies remain unsettled. China remains of core
concern, but broad concern over a global economic slowdown has put downward pressure on commodity prices
which in turn has placed significant downward pressure on
other emerging countries. A climbing dollar puts inflation
further from the target.
DOMESTIC FUNDAMENTALS
Despite headwinds abroad, fundamentals for U.S. growth
remain in place. Risk appetites have improved over the last
few years which should help drive the type of activities that
spur economic growth. Lower risk spreads, improving credit
98

Improving credit market
dynamics

JANUARY/FEBRUARY 2016

I T I S I N N O VAT I O N

Danil Melekhin/Getty Images

I expect economic growth to accelerate
modestly to 2.7 percent in 2016.

i3 - January/February 2016

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