What Happens in 2016?

Popular Economics Weekly

Even with interest rates rising, we see 2.5 percent plus GDP growth in 2016, because of strong employment and consumer spending. An early sign of this this trend is the Conference Board’s Index of Leading Economic Indicators (LEI) for November, with 8 of the 10 leading indicators that help to predict jobs, housing trends (via permits), interest rates, and stock market movements staying positive.

One LEI indicator, the so-called yield curve spread, focuses on the interest rate spread between short and the 10-year Treasury yield. The spread is narrowest (even negative, when short term rates are higher than long term interest rates) during recessions, per the Marketwatch graph, as in 2001 and 2008. The yield curve spread is currently a healthy 2 percent, with the 10-year yield currently at 2.25 percent, indicating good growth.

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Graph: Marketwatch

Wages and salaries that make up some 80 percent of personal income are rising, but much of it is being saved or used to pay down debt. Still, however, the year-on-year gain for this component, as seen in the Econoday graph, has been slowing to plus 4.5 percent for the lowest reading since March. Nevertheless, growth is still respectable and is being combined with strong savings, which is the light line in the graph. This rate came in at 5.5 percent in November which outside of October’s 5.6 percent is the strongest rate in three years.

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Graph: Econoday

That means jobs are available, gas prices are low, and consumers are building up their bank accounts. The spending side of the report isn’t so strong, however, up a respectable looking 0.3 percent for the month that includes Black Friday — but compared with no change in October. November’s year-on-year rate was only plus 2.9 percent, which along with October’s 2.9 percent are the weakest showings for spending since January last year.

But consumer sentiment is on the rise going into the final shopping days of Christmas, according to the U. of Michigan Sentiment Survey, up 8/10s from the December flash to a higher-than-expected final December reading of 92.6. The implied level in the final half of the report is in the mid-93 area which would be the strongest pace since way back in June. And in a sign of specific strength for December, the current conditions component is up 1.1 points from mid-month to 108.1 which is nearly 4 points over November.

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Graph: Econoday

So most signs point to a very robust holiday spending season, which should help early 2016 growth. First quarter growth in the past 2 years was slowed by the severe winters, but the west coast El Nino phenomena has already kicked in, with signs of a much warmer eastern and southern U.S.

In fact, year-on-year retail sales show non-store, online retailers out in front, at plus 7.3 percent. Restaurants are right behind at plus 6.5 percent year-on-year followed by furniture and by sporting goods, both at plus 5.4 percent. Altogether, core retail sales are up a moderate 3.6 percent year-on-year, but the plunge of 19.9 percent in gas prices is making everything cheaper, with Regular gas prices as low as $2 per gallon in many parts of the country.

Harlan Green © 2015

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

About populareconomicsblog

Harlan Green is editor/publisher of PopularEconomics.com, and content provider of 3 weekly columns to various blogs--Popular Economics Weekly and The Huffington Post
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