Last week I was able to attend Moody’s Analytics Economic and Consumer Credit Briefing here in Atlanta. This annual presentation by top economists covered U.S. macro, regional, and consumer credit outlooks. They presented on a wide range of topics, and while there are no guarantees for what the next year holds, economic modeling and forecasting provide greater context to current trends and what expectations are for the coming year. The following is a summary of just some of the topics that were discussed.
Labor Market and Consumer Spending
· Labor market indicators suggest that the U.S. is approaching full employment. Recent job growth has continued to outpace the growth in the labor force, as unemployed workers and marginally attached workers are absorbed and the labor market has tightened. The pool of workers is also unlikely to grow as baby boomers retire, which will put more pressure on the labor market.
· Underemployment – individuals that work part-time for economic reasons – is expected to decline as well. The most recent BLS report estimated that there were roughly six million individuals working part-time that would prefer to be working full-time but have been unable to secure such a position, also known as involuntary part-time employment. Another 2.5 million workers were marginally attached to the labor force. Both measurements have been declining over the past year and the underemployment gap has been shrinking.
· Wages are expected to increase as a result of a tighter labor market. Wage growth has been stagnant over the past five years, but as competition for talent and workers increases, additional upward pressure will be put on wages.
· With an increase in wages, consumer confidence will increase, and with it, we will see an increase in consumer spending.
Interest Rates and the Housing Market
· With the labor market approaching full employment, the Fed will want to begin raising interest rates in order to control inflation. Interest rate increases will likely happen relatively soon, possibly sometime between December and March.
· In early 2015, roughly 20.4 million young adults (18- to 34-year olds) were living with parents or relatives. As such, the multifamily housing sector is optimistic and predicts that there will be an increase in household formation over the next three years as millennials move in together.
· The median age of millennials is estimated to be 26, which is quickly approaching the average age of homebuyers – 32. They predict that the homeownership rate has bottomed out and will begin to increase as more millennials become homeowners which will create more demand for housing.
U.S. Regional Outlook
Much of the employment growth in the United States has occurred in the West and South, with both regions experiencing steady job gains. Meanwhile, employment growth in the Northeast has been modest but is improving. Employment in the Midwest and Great Lakes region is also improving, and it appears as though the worst is over for Detroit. Recovery will take a while, but its low business costs have spurred increased investment in the area. The labor market in the Midwest is very tight, and wages there will likely be among the first to be forced to increase due to the region’s slower than average growth to its labor force. The drop in oil prices has had a significantly negative effect on the western portion of the Southern states, though growth in the coastal southeastern states remains strong. In the housing market, residential construction permits have continued to increase across all regions, yet growth has also been strongest in the West and South regions.
While the overall outlook in the United States was positive, there are many uncertainties that could alter the projected course. The potential impact student loan debt could have, the risks associated with increased interest rates and its effect on investment, a possible financial crisis in emerging markets, and the recent Chinese stock market crash leave many questions in the air. Nevertheless, Moody’s was optimistic about the outlook for the upcoming year.