Economic Forecast 2016-2017 And Business To-Do Lists For The New Year

United States economic growth in 2016 will look a lot like the last few years, but with a different texture. Housing will be stronger and eventually business spending will grow, but foreign trade will prevent too much economic expansion.

Consumer spending will follow the overall economy in 2016, not lead it. Consumers have been increasing their expenditures by just under four percent per year, right in line with disposable income. Borrowing is growing just a hair faster (aside from student loans). If the economy were to surge forward next year, consumers would follow along. If the economy were to slow, consumers would follow along. But they will not lead the overall economy anywhere in 2016.

Housing is very likely to expand in the next two years. Vacancy is dropping for both traditional houses and multi-family units. Population growth is increasing so the demographic-driven demand justifies ten percent gains for two years or more. However, rising mortgage rates will limit housing construction in the second half of 2017.

Non-residential construction will grow slowly. Vacancy rates are declining across most commercial categories, but at too slow a pace to justify new investments in many parts of the country. Public sector construction will be little better than flat.

Business investment in equipment and software is likely to expand—but I thought that a year ago. Corporate executives lack optimism about future unit demand. Their current spending emphasizes cost-cutting, as in automation of labor-intensive tasks. Full blown capacity expansion will be needed given the overall growth of the economy. Companies have been increasing their inventories relative to sales levels, which is scary. Better technology for managing inventories should drive inventory-sales ratios down, not up as we have seen in the last few years.

Business To-do List for 2016: if you carry inventories, review your target levels and actual levels. Make sure that complacency has not led you to bloat your stocks of finished goods and work in process.