US Economy in 2016 – Steady As She Goes?

Posted by pbc_admin
on February 05, 2016

About this time last year, I wrote an article cautioning against the then prevailing over-optimistic posture of most of the financial and apparel industry press that 2015 was going to be the bumper year leading us all to prosperity.

You can read here:

The broad insistence of the enthusiasm was alarming. The fundamentals of the US economy didn’t jibe with the predicted boom. Jobs growth was slow and of questionable quality, wages growth non-existent, consumer confidence was lagging, the financial market was manic depressive. Where was this supposed surge going to come from? How was it going to be paid for? Was there to be another credit bubble?  Not again. Not another cycle of boom and bust. I could hear the words of the Credit Manager of the bank I once worked for echoing down from the barren post-1987 crash years, “This will never happen again”. Well, he has been at least 5 times wrong since. And the last one nearly saw the whole place circle the drain.

Twelve months on, we are thankfully getting a much more sober appraisal of the economic year ahead. The party line this year is that the economic trends of 2016 should mirror those of 2015. The US will see steady progress up an easy gradient of an estimated 2% growth while the rest of the world at best staggers along a flat path.

What can we expect during 2016?

  1. Weak Retail Sales – U.S. retail sales declined in December to ensure the weakest retail year since 2009. I bored everyone with the obvious in last year’s article (and ad nauseum elsewhere) by reiterating that the most significant driver of retail sales is disposable income. Right now, if people have it, they aren’t spending it. Rising healthcare and housing costs are exacerbating the continued weak wages growth for those who have decent paying jobs. Many people are scraping by. The jobs growth figures appear strong with an official unemployment rate of 5% which is technically full employment. No-one believes this number. But even if this were true, wages growth is lagging badly. If you are thinking of opening a bricks and mortar store, you better be a 1000% sure that you have the right product(s) at the right price for the right market and that you have a good quality, well targeted online presence, otherwise, don’t do it. I have retail clients and friends with retail stores in popular shopping districts in the greater Los Angeles area. Things are not good, and haven’t been for a while. The holiday season was a bust with a low year on year increase of 2-3% (below the National Retail Federation prediction, as usual), with early discounting, and with no last minute boost as experienced in previous years. We are waiting on January’s figures.
  2. E-commerce keeps clicking – web retail totalled more than $350B in the US for 2015. The US Commerce Department reports that internet retail accounted for 7.5% of total retail sales in 2015, up from 6.5% in 2014. For 2016, expect improvements in the functions of mobile online shopping such as slicker browsing and check-out processes, expect more relevant content coming your way than ever before through a more personalized online experience, expect more video content, and expect to see more social co-creation in 2016, especially in the apparel and accessory e-commerce sector where shoppers can drop their templates into existing designs and actually alter the designs of existing products and come up with personalized one-of-a-kinds.
  3. Careful with the plastic – there have been disquieting reports of the levels of household debt recently. a December 2015, article states, “Even after accounting for inflation, household debt has jumped 15% faster than income over the past dozen years.” They quote a new study by NerdWallet“After the significant dip following the recession, there was a lot of talk that Americans were using their credit cards better,” says NerdWallet credit expert Sean McQuay. “The numbers aren’t showing that. Americans are taking on more debt.” After the near meltdown of 2008 due to the overloading of debt, this news beggars belief.
  4. Continued social and political dysfunction – with a general election in November and with the delibitating influence of crazed nativists and religious militants both at home and abroad, we can expect continued social discord and political gridlock in the US. There is much handwringing in the US about the absence of legislation expected out of Congress this year as the Republican majority ensures no good and all bad for the White House and Democrats. There is not much to be done about this. With our rigged and corrupt political system and our polarized, irreconcilable social values, the best we can hope for is a Democrat to win the November election and at least keep the inmates from running the asylum.
  5. Which way the US housing market – most analysts believe the only way is up. Southern California saw a price increase of about 15% in 2015. The Real Deal website reports, “San Francisco prices are up 79.2 percent since 2009. Atlanta is up 53 percent. Phoenix, up 47.1 percent. Denver, 42.6 percent. Los Angeles, 49.7 percent. The magnitude of these gains rivals what we saw during the nuttiest portions of the 2000s bubble.”  The article goes on to state that “Don’t call this a bubble — mortgage borrowing is still low by historic standards — but things are changing. Consider a new type of mortgage San Francisco Federal Credit Union recently promoted. In response to “skyrocketing home prices” hampering affordability, the bank is offering a no-money-down mortgage with an adjustable interest rate and without requiring private mortgage insurance. Even 2005’s mortgage market would blush at those terms.” Prices will have to cool at some stage. Many analysts believe we are reaching that point.
  6. All eyes on China – some analysts believe that the China Syndrome the world caught in the last half of 2015 has passed while others are still concerned that a full blown contagion is still in the air. All agree that the Chinese economy will continue to slow. The positive take is that as China transitions both from a manufacturing-led to a consumer-led economy, and from a state-directed to a free market, it’s economic growth is hopefully slowing to a slower and more sustainable rate. A crash would be disastrous. China is such a big force in the global economy that the so-called “hard landing” that some predict would have a severe affect. Just last week, George Soros told an economic forum in Sri Lanka: “China has a major adjustment problem. I would say it amounts to a crisis. When I look at the financial markets there is a serious challenge which reminds me of the crisis we had in 2008.” Eek.

Soros isn’t the only doom and gloom merchant abroad. Some think the housing market in the US is overvalued by at least 25%. Others are, like Soros, think China’s convulsions are more serious than growing pains. Many think the US stock market is grossly overvalued. The Royal Bank of Scotland recently told their clients to “sell everything” because “in a crowded hall, the exit doors are small.”

Any one of these could occur. Who knows? For now, steady, sustainable growth is fine by me. The most important component of the “sustainable” is cash funded, not debt funded. We are in desperate need of more living wage paying jobs, and for more jobs with some wages growth. Until the population feels it has that bit extra to spare, it will not be shared around and the economy will continue to inch along.

My deepest concern is the outcome of the US presidential election. While I think Obama has been too lenient with Wall Street and the banks after their disgraceful and criminal activities leading up to the 2008 crash. And we don’t have a single payer health care or an expanded Medicare system, despite Obama explicitly campaigning and winning a strong mandate for health care for all. I believe he has done a remarkable job. Severely restricted by a bought and paid for Congress, he has run a pretty tight economic ship while paying for and winding down wars, keeping a gutted economy upright and ensuring the weakest and poorest aren’t completely forgotten.

He has also repaired some of the damage done by Bush and Cheney and their outlaws abroad. Obama’s “lead from behind” strategy in geo-politics is ridiculed in the US as weak but praised almost universally around the world as a relief. The world is done with the US bursting into the joint and blasting away like a drunken cowboy (or dry-drunk in George W’s case).

We are slowly gathering some positive momentum. A lurge to the right now by would be a disaster economically, socially and diplomatically.

Paul Brindley
Principal Adviser
paul brindley consults