2016 Economic Update: Blue Skies Ahead!

Clouds hung over the economy during the first-half of 2016; they darkened after June 23 when the British voted to leave the European Union. Financial turbulence intensified and the deep plunge in stock prices probably felt like a thrill ride at Elitch Gardens. The U.S. economy looks good, so let’s update conditions as we move into the second-half of 2016.

Financial Markets

Confusion about global impacts of Brexit hit investors hard. The Dow Jones Industrial Average dropped nearly 900 points in two days, but regained its pre-Brexit level quickly. Are more swings coming? While financial turmoil generates investors’ caution, borrowing costs remain low with the Federal Reserve unlikely to raise interest rates until confusion clears. Buying conditions for cars are good, with rates for new 48-month auto loans hovering near 4%, well below 8% in 2007. For businesses, AAA corporate bond rates are about 3.2% while short-term commercial paper rates remain below 1%. Financial stress is also fairly low. The St. Louis Federal Reserve Bank’s financial stress index, which measures the degree of stress spread across 18 financial indicators, remains below average.

Production and Income

Production has advanced at a slower pace this year. The U.S. Bureau of Economic Analysis reported the inflation-adjusted value of gross domestic product – everything produced in the country – growing at a slow annual rate of 1.1% in the first quarter. But real final sales of domestic product, which exclude inventory changes, grew 2.4%. Sales of cars and light trucks averaged more than 17 million through May, with production of motor vehicles and parts hitting its highest level since 1972. Gains in employment and income helped boost sales. Average hourly earnings in private businesses, for example, are up nearly 2.5% this year both nationwide and in Colorado. Those positives enhance consumers’ willingness to buy. But a cloud hangs over manufacturing as American businesses struggle to compete in global markets. A rising value of the U.S. dollar after Brexit does not help. 

Housing

Sales advanced more slowly, but new private housing starts stayed above last year’s level. The median house price is up nearly 40% since 2009, but the run-up has slowed. In May, the Census Bureau reported the supply of houses at 5.3 months, reflecting the time “for sale” inventory will last at the current sales rate. That is not high. New building permits for housing, which lead starts, leveled off in the first-half of the year. Although permits for single units rose, they accounted for a smaller share of the total as multi-unit structures rose faster. In June, the 30-year conventional mortgage rate was below its 2012 national average of 3.7%. Although buyers face issues of affordability, expect housing to expand through 2016. Denver remains a hot housing market.

Money Matters

Last October I noted changes coming for $10 and $20 bills. The Treasury Department recommended keeping Alexander Hamilton on the $10 bill. Secretary Jacob Lew summarized the $20 bill’s future on April 20.

“The decision to put Harriet Tubman on the new $20 was driven by thousands of responses we received from Americans young and old. I have been particularly struck by the many comments and reactions from children for whom Harriet Tubman is not just a historical figure, but a role model for leadership and participation in our democracy. . . . Looking back on her life, Tubman once said, “I would fight for liberty so long as my strength lasted.” And she did fight, for the freedom of slaves and for the right of women to vote.”

 

by Dr. Paul J. Kozlowski*

 

 

*Dr. Paul Kozlowski is professor emeritus of business economics and finance at the University of Toledo, and past-president of the Mid-Continent Regional Science Association. He has served as an advisor to business and government organizations for over thirty-five years, and his articles have appeared in a variety of economic publications and books. He holds a Ph.D. in economics from the University of Connecticut and lives in Denver.

Image courtesy of cooldesign at FreeDigitalPhotos.net

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