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Practical Economics

No Recession Brewing for U.S. Economy

Barring some serious shock, the economy overall should still post a good, albeit not great, year.

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These are anxious times for most Americans, with an economy that seems blah in many areas and some talk of recession in the U.S.

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Shrinking 401(k)s aren’t helping matters any. Slowing in China and other parts of the global economy plus sliding oil prices have stock markets in a tizzy, possibly on the verge of a mauling from the bear. No wonder folks are feeling antsy these days.

But many underlying fundamentals are sound, and we expect the economy to expand at a 2.5% clip in 2016, just a bit below what we had thought growth would be, and up a tick over last year, which ended weakly.

Not all sectors will be firing on all cylinders. Energy firms won’t see much of a recovery in oil prices, and more of them will throw in the towel. Exporters will continue to be slammed by the strong dollar, which we don’t expect will weaken much until 2017.

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Exports of goods will be largely flat in coming months, which in turn hurts many manufacturers, from makers of steel and other fabricated metals to producers of heavy machinery. Also hurt: pharmaceutical manufacturers, along with scores of their subcontractors and vendors.

Offsetting the weakness: A pickup in consumer spending, which accounts for roughly two-thirds of economic activity. We look for Americans to spend more of their gasoline savings on travel, dining out and other leisure activities, but less on apparel and other goods. Still, many will also opt to boost savings.

Business spending will be stronger than last year, with growth of about 4% over 2015. Firms will spend on technology and vehicle fleets but not so much on building up inventories. Plus, governments will open their fists at the federal, state and local levels, benefiting everyone from defense contractors to road and bridge builders (though 60% of new spending at the state level will go for required hikes in Medicaid).

Housing and health care services are sure to be bright spots this year. Both will help propel job and wage growth. Hiring overall will be strong, with employers adding 200,000 new workers each month this year, on average.

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Tech will remain a source of jobs, though the sector faces some turbulence. Ditto for leisure and hospitality. Food service firms are hiring big-time. Note, too, that business formation is on the rise, outside of energy. The largest numbers of start-ups are in health care, professional services and tech.

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