The presidential election is 12 months away. Knowing what we know now, what should we expect the economic backdrop to be when Americans go to the voting booths?
On Nov. 8, 2016 — Election Day — 17 leading forecasters from economic consultancies, financial firms and universities said unemployment would be the lowest it has been during an election since George W. Bush and Al Gore faced off in 2000, when it stood at 3.9 percent. The median forecast for the unemployment rate in November 2016 was 4.8 percent (which would be down from 5.3 percent last month). The exerpts saw only a 15 percent chance of a recession starting by next Election Day. Interest rates, inflation and gasoline prices should all be a bit higher than they are now, they said, while staying quite low by historical standards.
“On Election Day November 2016, voters should be feeling quite a bit better about where they stand economically and looking at their economic future a bit more optimistically,” said Scott Anderson, chief economist of Bank of the West.
The forecasters’ projections also point to a soft underbelly in the economy that the Republican nominee could exploit.
Their consensus was 2.8 percent growth in average hourly wages in the 12 months before the election, slightly higher than the 2 percent rise in prices. That implies that the weak spot of the Obama economy, in compensation for ordinary workers, will remain that way heading into 2016.
The forecasters saw only a 25 percent chance of an economic boom — defined as G.D.P. growth greater than 3 percent maintained for a year — happening between now and Election Day. This slow-moving expansion generally hasn’t resulted in the kind of explosive growth that was seen in the late Reagan or late Clinton administrations, and there’s a slim chance of that changing soon.
Jeb Bush and other Republican contenders have pledged to attain 4 percent annual economic growth — that would be a step up from the roughly 2.5 percent that has been typical of the Obama years.
Sustained growth of 4 percent or greater has been seen only rarely in American history, most recently from 1997-2000 and 1983-5. Those years had more favorable demographic trends driving that growth than the coming presidential administration is likely to encounter.
The forecasters, surveyed in early July, identified a number of threats that might undermine their forecasts of sunny economic skies in late 2016.
The Greek debt crisis was mentioned often, though the potential ripple effects for the United States economy appear much weaker than they did a few years ago when Greece’s position in the eurozone was first at risk. They mentioned the possibility of a Middle East crisis causing an oil shock, and a Chinese economic slowdown that seemed plausible given a recent sharp sell-off in its stock market. But the economic threat that the forecasters mentioned most often — the Federal Reserve raising interest rates — would be driven by domestic policy.
If the Fed moves too quickly to raise interest rates, it could potentially stomp on the housing recovery, and undermine exports by strengthening the dollar or causing dangerous volatility in financial markets.
The consensus of the forecasters was that the Fed’s target interest rate would be 1.37 percent on Election Day 2016; the consensus of Fed officials themselves was that the rate would be 1.625 percent at the end of 2016. Rates have been so low for so long that forecasters lacked confidence about exactly how robust an economic expansion would be in the face of tighter money.
Federal Reserve outlook
Federal Reserve officials maintained their forecast for the benchmark interest rate at the end of this year while cutting it for 2016.
The federal funds rate will be 0.625 percent at the end of 2015, according to the median estimate in the Federal Open Market Committee’s quarterly Summary of Economic Projections. That’s unchanged from the March estimate and implies two rate increases this year, assuming officials move in quarter-point increments.
The median estimate for the end of 2016 fell to 1.625 percent, compared with 1.875 percent forecast in March. The rate has been held at a range of between zero and 0.25 percent since December 2008. Fifteen officials predict liftoff this year, while two expect it to occur next year, the same as in March.
Economic growth in 2015 will range from 1.8 percent to 2 percent, compared with 2.3 percent to 2.7 percent in the last round of forecasts in March. The forecasts are so-called central tendency estimates, which exclude the three highest and three lowest projections.
The unemployment rate by year-end will be 5.2 percent to 5.3 percent, Fed officials said, and 4.9 percent to 5.1 percent by the end of 2016. In March, the forecast range was 5 percent to 5.2 percent for this year and 4.9 percent to 5.1 percent next year.
Consumer prices, as measured by the personal consumption expenditures index, will increase this year by 0.6 percent to 0.8 percent, officials projected, unchanged from the range projected in March. The Fed aims for 2 percent inflation.
Moody’s cuts 2016 global economic forecast
Credit rating firm Moody’s cut its 2016 global economic growth forecasts, with China and United States both trimmed and Russia and Brazil seen staying in recession.
Moody’s kept its Euro zone forecast unchanged despite the recent turbulence in Greece, at one and two percent in 2015 and 2016.
But Brazil’s output would shrink as much as 1% in 2016 and Russia’s as much as 1.5%.
The price of many globally-traded commodities has fallen very sharply in the last 18 months. The slowdown in China will continue to weigh on prices
It was a surprise move from the firm, coming just 12 days since its last forecasts. It put average growth in the top 20 world economies at 2.8% on average, versus the 3% it had forecast previously. It said the fresh cut reflected information that had become available since the earlier forecasts were published.
China, Japan and Korea’s growth saw downgrades partly due to expectations of more muted exports. Emerging markets Turkey and South Africa had their forecasts reduced too.
“The (China) policy stimulus measures that have been implemented have been broader-ranging and larger than we had expected. This suggests that the underlying economic environment is weaker than we previously thought” the report said.
“We have revised our US 2016 forecast down slightly as the negative impact of the stronger dollar seems more pronounced than we assumed previously,” it said cutting it to 2.6% from 2.8%.
Moody’s kept its Euro zone forecast unchanged despite the recent turbulence in Greece, at one and two percent in 2015 and 2016.
Meanwhile, it said Brazil’s output would shrink as much as 1% in 2016 and Russia’s as much as 1.5%.
“The recent fall in commodity prices and further depreciation of the currencies exacerbate an already unfavorable domestic economic environment in both countries,” the agency said regarding Russia and Brazil.
The price of many globally-traded commodities has fallen very sharply in the last 18 months. The slowdown in China, a major consumer of commodities, will continue to weigh on prices, according to Moody’s report.
“Slower growth in China makes a significant rebound in commodity prices in the near term unlikely. A more prolonged period of low commodity prices will lead to muted export revenues and investment for commodity-exporting G20 economies,” said Marie Diron, a senior vice president at Moody’s.
