The United States Economy in 2016

While economic turmoil impacted many of the world’s leading economies in 2015, the United States managed to get through the year relatively unscathed as its recovery from the global financial crisis continued.  In fact, the United States has returned to its pre-crisis position as a leading driver of growth for the global economy as the US economy has performed significantly better than most of its rivals in recent years.  Looking ahead, optimism in the United States is on the rise, despite what many of the candidates for next year’s presidential election in the US are claiming.  While some risks remain in place (most of them external risks), it appears that the US economy will record even higher rates of growth in 2016, providing a much-needed boost for a sluggish global economy.

Looking back at 2015, the United States economy has performed relatively well, although growth forecasts for the year were not met due in large part to another winter-induced slowdown in the early part of the year.  After slumping to just 0.6% annualized growth in the first quarter, the US economy soared in the second quarter (growing by 3.9%) before slowing again (2.0%) in the third quarter.  Overall, the US economy is forecast to grow by 2.5% in 2015, making this the tenth consecutive year in which the US economy has failed to reach annual GDP growth of 3%, the first that this has occurred in the history of the United States.  Nevertheless, the US’ GDP growth rate for 2015 compares favorably with that of the Eurozone (1.4% forecast GDP growth for 2015) and Japan (0.6%).

Looking ahead to 2016, we expect the US economy to continue to improve over the course of the coming year.  In fact, we expect the US economy to grow by 3.0% next year, ending the decade-long drought without a year of at least 3% economic growth.  This growth will be driven primarily by higher levels of consumer and business spending in the US, as domestic confidence levels continue to rise.  On the downside, a strong US dollar has eroded US export competitiveness in recent months and will continue to do so in 2016, while many of the US’ key export markets will remain weak in the year ahead.  Overall, the US’ forecasted 3.0% GDP growth in 2016 compares favorably with developed rivals such as the Eurozone (1.5%) and Japan (1.1%).

Over the longer-term, the United States economy appears set to grow at a relatively steady pace, with US GDP growth rates forecast to average nearly 3.0% between 2016 and 2020.  While this sounds impressive given the struggles of the past decade, such growth rates are significantly lower than the economic growth rates that were recorded in previous periods of US history.  This is due to the fact that there is now a lower growth ceiling in the US.  In fact, the US growth ceiling is now around 3%, much lower than in previous years.  While this remains significantly higher that the growth ceilings in the Eurozone (2%) and Japan (1.5%), it means that, for the foreseeable future, the US economy will not be able to match the growth rates of previous decades.  Moreover, with global economic growth rates stuck at around 3% per year, there is little opportunity for the US to export its way to higher rates of growth.  As a result, while the outlook for the US economy has improved, a return to the glory days of the past is not in the cards in the coming years.