We begin 2016 with expectations of ongoing moderate growth for the U.S. economy. Real GDP growth steps down from 2.4 percent in 2015, to about 2.1 percent for all of 2016. Strong job growth, low gasoline prices, easier mortgage credit, increasing wages and rising homeowner equity all favor the consumer sector in 2016. We expect interest rates to gradually increase over the course of the year, but slightly higher interest rates will not diminish consumer confidence. Steady consumer spending will stabilize the economy amid painful consolidation in the energy sector, headwinds for U.S. manufacturing, and economic and financial market stresses originating outside the U.S.
The Caixin China Manufacturing PMI for December registered its 10th consecutive sub-50 reading, with the December value hitting 48.2. Chinese stocks sold off on the news, souring equity markets globally. China is clearly losing steam in its manufacturing sector and likely in the rest of its economy too. The International Monetary Fund’s October 2015 World Economic Outlook shows China real GDP growth easing from 6.8 percent in 2015 to 6.3 percent in 2016. The risk for China growth appears to be weighed to the downside. Fortunately, ongoing gains in the U.S. and Eurozone economies and elsewhere will buffer some of the drag from underperforming China.
Europe has a tailwind at the start of 2016. fanned by easy monetary policy and the related drop in the euro relative to the dollar. The European Union is showing more consistent signs of growth. Third quarter 2015 real GDP growth for the EU was up by 0.3 percent over the previous quarter, the 10th consecutive quarterly gain. The Markit Eurozone manufacturing PMI for December increased to 53.2, showing improving conditions for manufacturers there. The IMF projects EU real GDP to increase by 1.6 percent in 2016. A key test for the EU may come from the United Kingdom with the promised plebiscite before the end of this year on the UK’s place in, or out of, the EU. The timing for the EU is bad. Just as the overall EU economy starts to gain traction, a key pillar of Europe is threatening to exit, reducing the psychological hurdle for other countries to do so, and reducing confidence in Europe generally.
Oil figures large in the global and U.S. outlook for 2016. Low prices are supportive of consumer spending but drag on already low inflation and capital spending. The deterioration of relations between Saudi Arabia and Iran has temporarily supported oil prices in early 2016. However, short of a significant supply disruption in the Middle East, we believe that downside risks to prices remain dominant through the first half of 2016. U.S. production will ease through the year as drilling budgets are slashed and industry consolidation continues.
For a PDF version of the complete Comerica U.S. Monthly with additional commentary, tables, and charts, click here: USEconomicUpdate_January_2016.