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Economic Forecasts


10 Predictions for 2016 on the Stock Market, the Economy, Politics and More

1) The U.S. economy is in for a good year, albeit not a great one. On the plus side: Consumer confidence will stay high. The downside: Growth in the industrial sector will be dampened, in large part because the U.S. dollar will stay strong.

See Also: Kiplinger's Economic Outlooks

Look for modest GDP growth of about 2.7%, a couple of ticks higher than 2015’s 2.5% expansion. But the number masks a few reasons for optimism about U.S. growth going forward: A gradual decline in the jobless rate and brightening job market. Housing, too, will continue to show improvement.

Overall inflation will pick up to 2.4% next year from just 0.7% this year. The core rate, which excludes volatile energy and food prices, will rise to 2.2%, a tenth of a point higher than this year. With little price pressure, look for the Federal Reserve to bump up interest rates just twice in the year ahead. The quarter-point hikes will lift the federal funds rate to 1% or a bit lower. Rates for mortgages and other loans will rise a half point or less.

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2) Chances of terrorism attacks in the U.S. and abroad remain high, even with stepped up efforts to root out potential terrorists. The fact is, the U.S. is an inviting target for lone wolves, and the presidential campaign, with the first votes in Feb., offers a high-profile backdrop for attention seekers. Europe is vulnerable as well, along with the Middle East, Asia and parts of Africa.

Meanwhile, Iran will create security concerns by violating the nuclear agreement that it signed with the U.S., China, Germany, France, Russia and the United Kingdom. Odds are that the violations won’t rise to a level that will lead to restored sanctions. But any bump in the already fragile environment will quickly ratchet up tensions.

3) Expect a shakeup in the Republican presidential race once voting starts. Texas Sen. Ted Cruz is favored to win Iowa and will become the front-runner, replacing Donald Trump. GOP leaders dislike Cruz as much as they do Trump. So someone will emerge as a mainstream challenger to Cruz. But who will it be? A fair bet: Fla. Sen. Marco Rubio. Cruz versus Rubio would be close and nasty.

If the GOP can’t heal its wounds, Hillary Clinton will win the White House. That’s a big if. For now, Republicans seem inclined to favor principle, not pragmatism.

The GOP will keep control of the House, though its huge margin will shrink. But don’t be shocked if Democrats take back the Senate. In their favor: The GOP is defending twice as many seats as Democrats. Democrats have a big edge in voter registration, too. They’ll need four pickups if Clinton wins.

4) Crude oil prices will bounce back in 2016, but just a bit after 2015’s slide. Figure on U.S. crude averaging about $45 a barrel, a modest increase from today’s price of about $37. That’s still less than half the cost per barrel in 2014.

Natural gas won’t fare any better. Abundant supplies and a mild winter so far have left the benchmark price at $2.22 per million British thermal units. For next year, we see an average closer to $2.50 per MMBtu – still a bargain for users.

The big wild card that could send energy prices soaring: War in the Mideast.

5) In the stock market, modest gains and more volatility as the bull ages. Tepid growth in corporate profits will help keep total returns, including dividends, near 8%. Dow Jones industrials should finish 2016 in the vicinity of 19,000. For bonds, get used to low interest rates and yields through 2020.

6) President Obama will travel to Cuba before leaving office in Jan. 2017. The historic visit will set the stage for Congress to lift the decades-old U.S. embargo, though that won’t happen on Obama’s watch. (And it will be delayed for years if Cruz or Rubio becomes the 45th president.) Some major sticking points remain, including billions in property claims that each side seeks and Cuba’s poor record on human rights. Still, the visit will help polish the president’s foreign policy legacy.

Obama won’t close Guantánamo Bay, leaving a promise unfulfilled.

7) The end of the 40% excise tax on high-cost health plans will be in sight, much to the delight of a strange bedfellows coalition of employer and labor groups. Obama isn’t likely to pull the plug while he’s in office, but presidential candidates from both parties will make it clear on the campaign trail that its days are numbered. The effective date was already pushed back by two years, from 2018 to 2020, under the recent budget deal. Still to be worked out: How to replace the money – an estimated $90 billion through 2025 – that would have flowed to the Treasury.

8) Congress will OK a trade deal that Obama covets – after a messy fight. The Trans-Pacific Partnership will ease tariffs between the U.S. and 11 other nations, including Japan, Australia, Vietnam and Singapore. China is not a participant, but it could be added down the line. Obama will need to address some problem areas, including anti-tobacco provisions that rankle Senate Majority Leader Mitch McConnell of Ky. He’ll also need to consider labor’s push for job training for displaced workers. Final votes are likely by the middle of 2016, a few months before the election.

9) More small satellites will mean big opportunities for all kinds of firms. 300-plus small satellites will be launched in 2016, three times as many as in 2013. The new devices will bring lower costs for Earth imaging and data analysis, which will make the information affordable for businesses of all types and sizes. All of the extra coverage will eventually allow Earth mapping in near real time.

The number of private drones will skyrocket, too – for hobbyists and businesses – leaving the feds to scramble to put more rules in place. There are safety questions, of course, especially near airports. But privacy issues will come into play as well.

10) Generation Z – 70 million kids born after 1998 – will start making a mark. These folks don’t remember when mobile Internet wasn’t widespread and necessary. Gen Z-ers will challenge merchants, and eventually bosses, with their wants. As employees, they’ll expect workplaces with the most up-to-date IT systems. But their culture and mind-set will take time to figure out, irking many employers. As consumers, they’re thrifty, not high on flashy brands and reliant on word of mouth.

Meanwhile, baby boomers will leave a mark of their own next year. At 70½, the first wave will start mandatory withdrawals from retirement funds. However, the gradual drawdowns won’t make much of a dent in the financial markets.

See Also: 2016 Outlook for Investors

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