This is Part 1 of a five part series on the hottest trends for 2016. Today we focus on emerging Economic Trends effecting U.S businesses. Kiplinger’s projects the following economic conditions by the end of 2016:[i]

  • GNP Growth 2.8%
  • Unemployment 6%
  • 10 Year T-Notes 2.7%
  • Inflation 2.3%
  • Crude 45$/bbl
  • Construction/Single Family +20%
  • Retail Sales +4.7%

Hot topics include: GNP: The World is Flat Circa 2016 – GNP in the U.S. is expected to rise from around 2.5% to 2.8%. Consumer spending will remain strong through the 2015 Holiday season and into 2016. This wave of consumerism masks economic weakness in the U.S.  Low energy prices have provided a temporary windfall. Net exports, government spending and investment are in the tank.  The strong U.S. dollar constrains exports, a key driver of economic output. Global GNP growth will be even weaker at 2.5% or less.  As China represents about 14% of Global GNP, its slowing growth rate is dragging down the world economy. As interest rates rise, global recession scenarios could materialize. Interest Rates: The Calm Before the Storm – Ernest Hemingway once said that one goes bankrupt gradually, then suddenly.  The same could be said about interest rates. The Fed’s Q4 Dot Plot (a bellwether for financial analysis) has not been released, but September’s graph suggests a Federal Funds rate escalating to 2% by 2017. The futures market expects a rate closer to 1.15%.  In other words, once the Fed moves in the next 30 days, expect consistent increases in rates over the next 24 months.  Capital will be more expensive. By the end of 2016, the 30 Year mortgage rate is projected to be at around 4.4% with 10-year treasuries at 2.7%. Terrorism and Market Volatility – It is impossible to pontificate on things as variable as the Dow Jones Industrial Index. Some have wondered if the Paris attacks and various conflicts in the Middle-East could spark a sell-off. One Citigroup analyst said “We have upgraded the risk of terrorist attacks not only in the Middle East but also in the West, as well as the likelihood of increased international military intervention in ISIS strongholds in Syria, Iraq and Libya. ” Yet after the attacks in New York (9/11) Madrid and London, markets returned to their value after a 30 day correction. So perhaps investors should be more focused on fundamentals such as interest rates and strong corporate profits (projected to grow 7% in 2016) than geo-political shocks. China on the Brink – We are consumed with China its sprawling buildings, infrastructure and consumerism. Yet China has all of the trappings of a state-run economy that grew too fast.  Much of the hype about China is smoke and mirrors, as its credit markets are overleveraged, currency manipulated and dependency gap widening. China’s central bank cut rates 6 times in the last 12 months. The country suffers from over-capacity and stifling pollution. Just a couple of years ago China was promoting 10% growth rates, but 2016 forecasts are for a 6.5% growth rate. Some believe that the Chinese government overstate growth rates.  Not so Full Employment – While the unemployment rate hovers around 5%, the swelling number of U.S. underemployed (around 10%) continues to create a drag on the economy. Job growth is stronger in construction, health care and retail, offsetting losses in oil and mining.  The Widening Dependency Gap – The proportion of “aged population” to those working people supporting them continues to rise. Author Fred Pearce points out that roughly half of the humans that have ever been over 65 years old are alive today (as a result of better health care). It is projected that by 2035, 1.1 billion people (13% of the world’s population) will be 65% or older. 13% may not seem like a lot, except when you think about the fact that it takes 1.5-2.0 working adults to fund every aging senior and their disproportionately higher health care costs. Wage Inequality: The Plot Thickens-Economists point to the “Phillips Curve”, the phenomena that suggests that job growth should spark higher wages and ultimately higher inflation. Yet the current job recovery has only spearheaded meager increases in wages (2.5% this year). While political pundits like to point out a conspiracy to suppress the middle class, the declining cost of automation (it costs the equivalent of about $2 an hour to employ a robot) creates market forces that will continue to depress wages for unskilled workers.  With escalating health care costs and minimum wages being raised in some cities, there will be pressure to under employ workers. Surge Pricing: When Demand Meets Supply – Retailers are seeking to capitalize on market timing on key products.  Taking a page out of the airline industry, pricing will become a function of true market conditions. Improved analytics allow retailers to shift prices on a dime, and offer promotions based on buying behavior, social media trends and consumer preferences. Oil Sinking to the Bottom – Oil prices are projected to hover in the $45-$55 a barrel range, throwing a wrench in world energy markets.  Assumptions for shale projects bottom out at around $60 a barrel. The industry is unsustainable at current pricing levels. Yet the bottom may even be worse for state sponsored oil producers such as Iran that needs $130 a barrel pricing to break even (and whose product will enter the market shortly at a rate much lower than that). Even though the break-evens are $80 for Qatar and $105 for Saudi Arabia, OPEC does not seem willing to back down. The U.K. vs. The European Union – Brits are split on if the U.K. should separate from the European Union, a prospect that could throw world markets into a tizzy. While membership provides access to over 500 million consumers, some in Britain think that the U.K. would be better off making its own trade deals, reducing regulations and protecting its borders. Deflation in Europe poses a significant threat to the global economy. New Markets: Cuba- As the US and Cuba normalize relations, the largest market Caribbean nation could be a boon to US companies. While the Trans-Pacific Partnership has not been finalized, its signing could spur a series of free trade offices in states pursuing a trade strategy in the Pacific.

[i] The Kiplinger Letter-Economic Forecasts Sources: The Hidden Costs of Terrorism by Ross Sorkin-The NY Times Goldman: The U.S. Economy will Need More than Just Consumers in 2016 by Luke Kawa Bloomberg Business Age Invaders-The Economist Here are the break-even oil prices for 13 of the world’s biggest producers Business INsider Looking for a rise-The Economist China’s Consumers Need to Step Up-Bloomberg Business Forecasting a global recession by Buttonwood The Economist What will the U.K. Do? – Bloomberg Business