Prospects And Challenges For The U.S. Economy In 2016

Por Alejandro Chafuen: Publicado el 1/1/16 en:


Unemployment continues to fall, inflation is in check, interest rates remain near historical lows, the governments of major U.S. partners have no intention to engage in trade wars, and the price of oil and energy continues to fall. There are no major storms in the forecast for the U.S. economy.  Nevertheless, very few economists, if any, are forecasting a growth rate of more than 3% for next year. What is holding back the U.S. economy?

Three factors conspire against growth: the uncertainties about which road will the U.S. economy will take after the next presidential election; the continued high cost of the regulatory state and all its effects, from corruption to arbitrariness; and the lackluster performance of most major western economies.

Forbes_Chafuen for 2016

The stock market indices are close to their all-time high, almost at the same level as the end of last year. They have recovered nicely since their low in September. Unemployment stands now at 5%, lower than last year’s 5.8%. That means 1 million fewer people are unemployed, but this figure does not reflect the fact that 2 million more people have left the labor force since last year, so in terms of the percentage of workers in the labor force we are back to the late 1970s. In addition, almost half of the increase in the newly employed (470,000) were in the health care sector. I doubt that it is because “Obamacare” is less costly — just the opposite, it is more expensive and cumbersome. It imposes heavy costs on employers who want to hire more than 50 employees or offer more than 30 hours of work to those who are working less than part-time.

In the monetary arena, I forecasted last year that, as a way of precaution, the Federal Reserve was likely to begin introducing higher rates early in the year. My timing was wrong; the Fed waited until December. By announcing that it will increase the federal funds rate gradually, and modestly, a quarter point each time, it has already led the market to anticipate and factor that move.

In my Jan. 1, 2015, piece, I wrote that “with monetary easing in Europe and more prudence in the Fed, the U.S. dollar could likely strengthen another 10 percent against the Euro.” That is what happened on a year-to-year basis. There is still room for the dollar to strengthen another 5% against the Euro in 2016. Borrowing in Euros and investing in U.S. assets might still be a good strategy for 2016. Currency “wars,” with China trying to increase the role of the renminbi, will continue, but the impact will not be dramatic—at least not for the next couple of years.

With government debt passing $18 trillion, Obama keeps beating his record of increasing federal borrowing more than any other president in U.S. history. During his tenure, government debt increased by $8 trillion, and there is still more time to go. Yet, as interest rates will continue to be extremely low, the costs will not be felt this year.

Storms continue to cloud the future on the national security front. This is an area that should not be neglected. Both the reality and the perception of security threats have huge implications for the economy. A free economy is nothing but the free movement of goods, money, and labor. Those same freedoms can be exploited by those who want to cause harm, and those abuses can be used as excuses for those who want to promote protectionism and restrict the entry of competitors.

In 2014, we had the Russian intervention in Ukraine and the rise of the Islamic State, ISIS. In 2015, we saw new tensions with Russia in Syria, and with China in the South Seas. Apart from a successful catastrophic attack in the homeland, confrontations with Russia or China can have a much greater impact in the economy of the United States than all other security threats. Central and Eastern European countries are devising their own way to counter Russia. U.S. diplomats will work to prevent major issues with China, so I expect a stable “uneasiness” on both fronts, but no major confrontation.

In addition to terrorist violence in the Middle East, the acts of violence of Boko Haram in Nigeria and neighboring countries, Cameroon, Niger, and Chad, continue to be a grave threat to that region. The role of the United States is that of helping the local governments contain and defeat them. Given the little economic relevance of those countries for the U.S. economy, their threat does not enter into the economic debate. More problematic were the Paris attacks, the numerous terrorist events in Turkey, and the recent San Bernardino attack. Libertarian economists might point out that, statistically, they are not very significant, but the attacks have huge cultural and social impacts and can marginalize efforts to promote more restraint in U.S. foreign interventions. With little willingness to send large amounts of U.S. troops abroad, and with defense spending at manageable levels, the growth or decline of the U.S. economy will not depend on this sector.

The forecasts on the price of oil continue to underestimate supply and overestimate its price. Except for some of the oil-producing states, this will be a boon for the economy. If you own oil stocks, enjoy the high dividends but do not expect much growth. The positive impact of cheap oil and gas will be mitigated, however, by an intrusive regulatory state, and by the uncertainties created by the political battles over health care and immigration that will continue during 2016. Do not expect much change during these next 12 months. The recent budget deal can serve as an indicator that the Republicans will avoid major battles in Congress. The national debate will continue, but in the presidential campaigns, as usual, real action will be reserved for the future.

World trade has stalled at 2008 levels, and it has even gone down this last year. Free or freer trade is a great engine for healthy economic growth, and despite some protectionist voices, I do not expect trade wars — but neither do I anticipate much advance. Last year, I stated that “President Obama’s search for a positive legacy in the international arena might still lead him to turn his back on his more ideological base and push to approve TPP and TTIP.” After the approval last October of the Trans-Pacific-Partnership (TPP), the next challenge is the Transatlantic Trade and Investment Partnership (TTIP) with Europe. I believe that even in this polarized pre-electoral political environment, it will be easier to achieve consensus in the United States than in Europe for its passage. But, because of opposition across the Atlantic, it is doubtful that the agreement will be signed before the end of Obama’s term.

The 2016 U.S. economy can’t expect much push from its neighbors. Mexico and Canada, which together represent 30% of total U.S. trade and one third of U.S. exports, will continue to grow at modest rates. Mexico’s GDP will likely increase by 3.6%, one percentage point more than this past year. Canada, on the other hand, will likely grow at a more modest rate, just above 2%. Europe, another major trade partner, survived the Greek and other radical populist crises, but, on average, will grow less than the United States; I anticipate the same with Japan.

Respect for the rule of law in the United States has been declining, and, unfortunately, respect for private property continues to go down in the world. In the Fraser Institute index, the U.S. score in this front went slightly down (from 7.02 to 6.97), but it is way down from the year 2000, when it stood at 9.23. The United States is now 29th in the world. In the Heritage Foundation index, respect for property rights in the United States went down from 4th place in 2009 to 20th today, same as last year. In the rule of law index of the World Justice Project, (which ranks 102 countries), the United States is again in 19th place. Of the top 10 economies, four countries—Germany, the United Kingdom, Japan, and France—have better rule of law scores than the United States. Nevertheless, given the size and opportunities in its economy, the United States will remain as an attractive destination for foreign investment in 2016.


Alejandro A. Chafuén es Dr. En Economía por el International College de California. Licenciado en Economía, (UCA), es miembro del comité de consejeros para The Center for Vision & Values, fideicomisario del Grove City College, y presidente de la Atlas Economic Research Foundation. Se ha desempeñado como fideicomisario del Fraser Institute desde 1991. Fue profesor de ESEADE.