U.S. Economic Outlook 2016: GDP, Debt, Inflation, Interest Rates

Economic-OutlookFor 2016 and beyond, all official U.S. economic forecasts call for stronger growth ahead. But, economic output is not the only variable on the rise. Inflation, debt levels, interest rates, and market valuations are also increasing. What does this mean for investors?

Official Forecasts

On April 29, 2015, the Federal Reserve released an updated U.S. economic forecast for 2016 and years ahead.

The Fed reaffirmed that the federal funds rate, the benchmark short-term interest rate, is currently in its correct range; 0.0% to 0.25%. That said, what the market continues to grapple with is the reality of higher interest rates ahead. Notably, the Fed stated that it would look at both realized and expected economic data related to employment and inflation.

So, what are the official expectations? The Congressional Budget Office (CBO) estimates that the U.S. economy, after growing 2.1% in 2014, will expand at 2.9% in 2015 and 2016. The majority of the economic growth will be driven by a rise in consumer spending and fixed asset investment by businesses. For example, consumer spending will account for 2.3% of the 2.9% gross domestic product (GDP) growth expected in 2015. (Source:CBO, last accessed May 7, 2015.)

The CBO also forecasts that stronger hiring in the coming years will reduce unemployment from the current 5.5% to about 5.3% by the end of 2017. The Federal Reserve is more optimistic. Current forecasts call for unemployment to be in the range of 4.8% to a high of 5.1% by the end of 2017. Therefore, the headline unemployment number is expected to decrease slightly. (Source: Federal Reserve, April 8, 2015.)

Economists at the CBO also have a forecast for inflation. They expect inflation, as measured by the personal consumption expenditure index, to stay below the Federal Reserve target of two percent until 2017. The latest numbers, from the Bureau of Labor Statistics, show inflation stood at -0.1%; which means prices are declining. (Source: BLS, April 17, 2015.)

A sharp rise in inflation is expected. The absence of an increase will likely push the Federal Reserve’s interest rate decision past the July and September 2015 meetings, which is the current consensus.

Interest Costs and Debt

One thing that isn’t on a positive trajectory is debt. According to the CBO, as of 2014 year-end, public debt stood at $12.8 trillion or 74% of GDP. (Source: CBO, January 26, 2015.)

What is surprising is that despite positive economic forecasts for 2016 and beyond, and rising inflation, U.S. debt levels are not expected to decrease. You would think a better economy would require less borrowing. But, in fact, the opposite is true. The $12.8 trillion of debt, held by the public, is expected to rise to over $21.0 trillion, or 79% of GDP, by 2025.

Not only will debt rise, but so will interest rates.

The interest rate on a three-month Treasury bill currently stands at 0.01%. That’s essentially zero percent—or zero return for the holder. A U.S. Treasury bill with a 10-year maturity currently has an interest rate of 2.12%. (Source: U.S. Treasury, last accessed May 7, 2015.)

The CBO expects interest rates on three-month Treasury bills to average 0.2% in 2015 and rise sharply to 1.2% in 2016. In the long run, that same Treasury bill is expected to average 3.5%. That’s a sharp move up in short-term rates, but is merely a return to normal conditions—an environment the market isn’t used to.

At the long end of the curve, interest rates are expected to increase as well. For example, 10-year Treasury note yields are expected to increase from their current rate of 2.12% to 3.4% by 2016, and over 4.5% in the long run. The last time the bond market saw 10-year notes yield 4.5% was in August 2007 before the financial crisis took hold.

A rise in Treasury interest rates inevitably means an increase in U.S. government borrowing costs. Interest rates on the continuously increasing U.S. public debt will rise. The CBO expects the average interest rate on debt to climb from 1.7% in 2015 to 2.0% in 2016, and to 3.3% by 2020 year-end.

The CBO also highlights that debt levels are at historically high levels. Debt held by the public in 2014 was the highest since 1950. As a percentage of GDP, public debt in 2014 totaled 74%. That’s about twice the average levels experienced in the period between 1965 and 2014.

In fact, as recent as 2007, debt as a percentage of GDP only ran at 35%. However, the Great Recession of 2008 to 2009 had severe consequences on Federal coffers. U.S. economic forecasts for 2016 see U.S. public debt reaching 74% of GDP. Federal obligations and increasing interest expenses will have significant effects on the U.S. economy in 2016 and beyond.

The problem is that interest rates on debt are set to rise. On top of that, given budget assumptions and economic growth forecasts, total U.S. public debt levels are also set to increase. As a result, the federal budget deficit will also widen.

An increase in debt and servicing costs squeezes government finances. National savings will drop, limiting investment into the U.S. economy. Moreover, onerous budget shortfalls will handcuff the Federal government in responding to future crises.

Read More

Article Index
Economic Outlook

It looks like the U.S. economy is already in a recession, according to these indicators. The Institute of Supply Management’s Manufacturing Purchasing Managers’ Index (PMI) has been below 50 since October of 2015. Any reading on the PMI below 50 suggests a contraction in the manufacturing sector of…

George Soros Is Worried About This China’s state media has warned billionaire investor George Soros against betting on falls in the value of the Chinese yuan (CNY) and the Hong Kong dollar (HKD), amid widespread worries over a possible Chinese economic collapse. China’s fourth-quarter economic growth hit its…

The U.S. jobs market is fundamentally tormented. The job numbers look great on the surface but underneath, there are major problems. According to the U.S. Bureau of Labor Statistics, the U.S. unemployment rate declined from 5.7% in January of 2015 to just 5.0% in December 2015. (Source: Bureau…

How Safe Is the U.S. Economy from Economic Collapse? Monetary cocaine is the only thing staving off a U.S. economic collapse and it’s something President Obama and the Federal Reserve don’t want to talk about. The world economies and power brokers helped to finance the six-year bull market…

The 2016 World Economic Forum (WEF), also known as Davos, named after the Swiss mountain town in which it takes place, now in its 46th edition, opened on January 20 amid grand and rather phony fanfare. On the agenda: the upheavals brought about by digital technology in all…

Looming Economic 'Reset' Should Terrify Investors Although treated almost as gospel in the West, Keynesian theory is a relatively new development in the long history of economics. However, its backwards ideas are pushing the world to a global economic 'reset'. As opposed to traditional economic practice (sometimes referred…

Sluggish Banking Sector Burdens U.K. Economic Forecast for 2016 The U.K. economic forecast for 2016 should be examined with the facts that the U.K. economy is the fifth-largest economy in the world and the second-largest in Europe at the forefront. If the region votes the wrong way in…

IMF Lowers Economic Outlook for 2015 In what appears to be standard routine these days, the International Monetary Fund (IMF) slashed its economic outlook for 2015. This would mark the fourth consecutive downward revision from the IMF, suggesting that China’s stock market crash has left a deep impact…

The Federal Reserve’s reckless monetary policies have created a colossal asset bubble, which could trigger a stock market crash and global economic collapse in 2016. At least, that’s the opinion of famed market commentator Marc Faber. In an interview with CNBC on Wednesday, the editor and publisher at…

Is the U.S. on the verge of economic collapse? If you listen to the talking heads on CNBC, the answer is a definite “no.”  But how can they then explain the constant barrage of disappointing economic data? That was the case again this morning with the release of…

To be candid, my stock market analysis continues to yield one overriding factor for this market—it’s all about the Fed. That’s it. Chinese economic news matters increasingly, and Greece’s sovereign debt problems did affect sentiment. But make no mistake; U.S. equities are trading off monetary policy expectations and…

The U.S. job market showed further signs of improvement with unemployment claims dropping to 281,000 for the week ended July 11th. The number reflected a decrease of 15,000 from the previous week’s 296,600 claims. (Source: U.S. Department of Labor, July 16, 2015.) Less than 300,000 people were let…

Wall Street opened sharply higher on Friday July 10th, as investors cheered the Chinese rebound and felt optimistic over the new submitted proposal by Greece to creditors to win new funds and avert bankruptcy. Chinese stocks rose sharply for the second day on Friday, with the Shanghai Composite…

The economic outlook for 2015 was looking pretty average before. But now with the decision of Greece to reject the austerity program imposed on it by its lenders, along with the stock market bubble in China, things out there are looking downright frightful. What the Charts Are Saying…

While investors worry if a Greek debt default could bring on a global economic collapse in 2015, one indicator suggests the crisis has already begun. According to the World Trade Monitor, world export prices in April declined by 15.8% year-over-year. This represented the biggest decline since the financial…

Traders received another piece of disappointing economic data, suggesting the U.S. economic outlook isn’t as rosy as many economists believe. On Tuesday, June 30th, the Institute for Supply Management (ISM) reported Midwest manufacturing activity declined last month. In May, the Chicago Purchasing Manager Index (PMI) climbed to 49.4…

U.S. consumer confidence jumped up to a five-month high in June, signaling the U.S. economy is picking up momentum. The University of Michigan released its final results on consumer confidence for June 2015. The Consumer Sentiment Index rose to 96.1 in June, a six percent increase compared to…

If you live in one of the top 20 metropolitan areas of the country, you have probably already witnessed a strong appreciation in your house’s value over the past several years. Based on my economic outlook for 2015, I believe there could be more to come for homeowners.…

Brazil, Latin America’s largest economy, is in turmoil and teetering on disaster. Just five years ago, as the global economy was in the midst of one of the biggest economic disasters since the Great Depression, Brazil was one of the bright spots. Not anymore. Brazil’s economic outlook for…