- U.S. economy set for modest rebound after several disappointing quarters
- Domestic demand continues to drive growth
- Worst for industrial sector may be behind us
- Economy not showing signs of excesses that lead to recessions
As another uneven year of growth draws to a close, a modest economic expansion remains the outlook in the United States. The reason behind our continued optimism is that the challenges facing the economy are largely coming from external rather than internal sources. Problems abroad have slowed U.S. exports and hurt commodity industries, leading to a modest decline in business investment. However, steady domestic demand (particularly in the consumer sector) has more than offset that drop.
This tug-of-war between domestic strength and global weakness is one reason overall U.S. growth has been slow. After leading the economy out of recession, mining- and export-oriented manufacturing sectors have been hit hard by the double whammy of collapsing energy prices and a higher dollar. The good news is that much of this painful adjustment is now behind us, which should pave the way for steadier growth in 2017.
In terms of the key variables that drive household confidence and spending (namely employment and income), the outlook is the brightest since the Great Recession. Households have not only resumed spending at a decent clip, but they are doing so for the right reason: they are earning more. This differs from what happened a decade ago, when spending was fueled by debt accumulation. The latest Census Bureau figures show that real median family income rose 6.0% in 2015. That is the largest gain in almost 60 years, and it finally brings income above pre-recession levels.
The persistent improvement in the household sector is underscored by strength in the labor market. Solid, steady job growth has been the one constant amid the ebbs and flows of the economy’s expansion. More than 14 million workers have been added to American payrolls since the worst of the financial crisis, and the headline jobless rate is now effectively at a level the Fed considers full employment. Cyclical improvement in the labor market appears to be finally outweighing headwinds from retiring baby boomers, easily available disability benefits, and generous student aid.
Putting all of this into perspective leaves us less pessimistic than many market commentators who worry that the current economic expansion (while admittedly long historically) is showing signs of petering out. No expansion lasts forever, and our sense is that we are now into the later stages of this one. But while risks have edged up slightly over the past year, they remain modest by historical standards. Indeed, although the U.S. expansion is aging, it appears to be aging well.
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