First Quarter 2016 Review

After slow actual or expected real GDP growth of 1% for two consecutive quarters, the U.S. economy is forecasted to return to a moderate pace of 2% real GDP growth in Q2 2016 through Q4 2016. Despite headwinds in goods producing areas of the economy, overall labor market conditions have continued to improve with average net employment growth somewhat above 200,000 per month, aggregate wages showing nascent signs of acceleration, and labor force participation beginning to rise. Although the pace of labor market improvement is expected to moderate somewhat in the coming quarters, overall consumer fundamentals remain sound as exemplified by a low overall household financial obligations ratio, generally improving consumer finances and increasingly healthy housing markets.

In conjunction with normal financial conditions (access to credit, low inflation and reasonable interest rates) in most areas and the expectation for supportive monetary policy from the Federal Reserve, consumers are expected to drive overall economic growth this year with broad‐based spending and continued housing investment.

  • Although the international background for exports, energy and many other commodities will likely remain challenging in 2016, some price stabilization and moderate increases are expected to emerge gradually as the year progresses.
  • Elevated inventory‐to‐sales ratios are also expected to stabilize and begin gradual but welcome declines in the second half of the year.
  • Corporate profits are forecasted to bottom and begin a moderate growing trend from the recent “profit recession.”
  • Capital investment should gain some support from favorable legislation in the most recent Federal budget.
  • Consumer inflation is forecasted to return to intermediate trends around the overall inflation of 2% favored by the Federal Reserve.
  • The Federal Reserve is expected to raise the Fed Funds rate target cautiously in 2016 so as not to jeopardize the current economic expansion, but the forecast for modestly accelerating economic growth and inflation incorporates 2 quarter point increases in the Fed Funds rate target by year‐end.

The risk of a mild recession is still present in 2016 given modest and variable overall U.S. GDP growth and uncertainties in the international economy, but the risk of recession has declined since the beginning of the year.

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