Strauss’ Economic Predictions

Business visionWhat are your expectations for the economy heading into 2016?
Everything seems to be balanced. We don’t have too many sectors that are running too hot. There is still probably excess capacity in almost every industry out there, including the more than strongly performing manufacturing sector which had been quite strong up until this past year.
All in all, we are looking at an economy which I refer to as a tortoise economy, slow and steady in terms of the growth. What’s expected in the next year? More of the same perhaps is expected, but with more upside potential. We were expecting that same kind of upside potential this year so we saw the dollar strengthen significantly which has caused our exports to be a bit more challenged to sell abroad. That also caused imports to rise quite dramatically so our trade deficit was a big head wind over the past year. That is in large part what caused the disappointment in the manufacturing sector.
As far as interest rates, what are your projections for 2016?
The summary of projections made in September was to see the federal funds rate rise by about 100 basis points between the end of this year and the end of next year. We will have an updated projection later this month and will present that in January. But, interest rates are expected to go up.
Given the kind of pace of growth we are seeing and the challenges happening all around the world, the Fed has already stated that they are going to be very cautious in the pace of those rate increases. We are going to be sensitive to the state of the economy as we move forward.
How do you see employment levels in the year ahead and their impact on the economy?
The employment levels have been impressive this year. We are seeing percentage gains that are double what the labor force would typically be growing at. The 5% unemployment rate is a bit misleading in as much as I would normally suggest the labor market is at a normal rate of operation. It just doesn’t feel that way especially when you look at other measurements of the labor market such as participation which has come down probably more than what demographics alone would explain.
If you look at the percentage of unemployed who have been unemployed more than 6 months, that figure remains significantly higher than anytime we have seen since World War II. That normally goes up during the downturn, but comes down quickly as things recover.
People working part-time for economic reasons remains high. Finally, it is the fact we have seen little wage pressure. If we were at a full utilization of our labor force, I would expect to see more stories about people having to bid away workers from their competition in order to find the workers they so desperately need. Yet, when you look at what is happening to wages it has been all in all relatively restrained and for the most part quite low.
What is your outlook for the commercial real estate sector for 2016?
The outlook for the commercial sector looks okay. We are continuing to see job growth and so I think that is going to help out in terms of businesses and their need for office space and retail sales. I would suggest the excess amount of capacity in the commercial real estate market will be worked off a bit and will improve and spur some additional production and buildings going up.
I think when you look at the housing sector there is a very strong need for multi-family housing. There is a real move towards urban living from the millennial generation. The greatest uncertainty is whether that is something that is desired or something that is forced upon them because we have seen little wage growth and income gains.
Arguments are being made that this millennial generation is not in a position to be able to go out and get a house and they are delaying a lot of activities, i.e. getting married, buying vehicles and homes. Right now, they seem to be choosing to be in the urban area and hence the need for apartments and condominiums seems to dominate.
About Strauss:
William A. Strauss’s chief responsibilities include analyzing the current performance of both the Midwest economic and the manufacturing sector for use in monetary policy. He has taught as an adjunct faculty member at Loyola University Chicago and Webster University in Chicago. He currently teaches at DePaul University Kellstadt Graduate School of Business and at the University of Chicago Graham School of Continuing Liberal and Professional Studies.