Master Builder

September 2016

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BY ELLIOT EISENBERG, PH.D. GRAPHSANDLAUGHS, LLC Economic Forecast for the Remainder of 2016: Decent but Nothing Remarkable D espite GDP slowing in Q1 to just 0.8 percent, the economic recovery that started in July 2009 continues. Incoming employment, housing and service sector data point to a modest pickup. GDP growth should average close to 2 percent the rest of the year as the economy rebounds from Q1. The combination of continued wage growth and increased residential construction suggests that 2016 will continue to improve. Despite weak energy prices, a continued strong dollar and a struggling agricultural sector, the rest of the economy is okay. As long as the service sector and construction continue to expand and wages rise, economic growth will continue. Importantly, the labor market remains strong. Job creation, while down from 2015, remains healthy, suggesting there will be little slack in the labor market by summer 2017. Finally, passage of the FY 2016 budget boosted economic activity by extending some tax breaks and easing domestic and military spending caps, making fi scal policy pleasantly expansionary. A defi nite economic bright spot in 2016 has been housing due to rising household formation. After averaging well over 1.2 million annually from 1983 through 2006, household formation plummeted to 600,000 in 2014. Since then, it has been rising by about 1.2 million annually. Add slightly improved credit access, and housing starts should reach an annualized average rate of 1.19 million in late 2016—their best level since late 2007, with new construction contributing 810,000 single-family and 380,000 multifamily units. Despite being constrained by low inventory, pending home sales are strengthening and existing home sales should rise by 3 percent annually, while home prices should rise by 5 percent annually. As for infl ation, it remains benign but shows signs of slowly rising. The dollar is likely to strengthen slightly by 2016's end and oil prices appear to be solidly above the lows hit earlier this year, ending two trends that have exerted strong defl ationary pressures on imports and energy, respectively. As the unemployment rate continues falling, labor shortages are increasing. This pushes up wage growth, which is rising modestly, and thereby boosts household spending. However, rising prices and wages will probably push the Fed to raise short-term rates by one-quarter-of-one percent by the end of the year. Long-term rates will remain very low and 10-year Treasuries will end 2016 at 1.60 percent as the economy slowly strengthens. In summary, the economy continues to grow modestly. Short-term interest rates are likely to rise slowly along with wages and residential construction activity looks to continue and strengthen as we go into 2017. Most critically, continued solid job creation will keep consumer spending up and the likelihood of a recession during the next six months, close to zero. Elliot Eisenberg, Ph.D. is President of GraphsandLaughs, LLC. Contact him at Subscribe to his daily 70-word economics and policy blog at or by texting "BOWTIE" to 22828. 51 09.16 master builder government advocacy

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