Slow but steady

2016 Mid-Year Economic Forecast

There is certainly plenty of good news to report about the U.S. economy, which has now been in a seven-year expansion period.

The U.S. unemployment rate is at 4.9 percent. The nation’s economy created 287,000 jobs last month, bouncing back from low job creation in April and May.

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The stock market has recovered from its 2015 dip and the Dow Jones Industrial Average and the S&P 500 reached record levels this month.

The commercial real estate market has rebounded in southeastern Wisconsin, with cranes towering over numerous major development projects around the region.

Yet despite those bright spots, the overall U.S. economic picture remains one of stubbornly, if reliably, slow but steady growth.

The nation’s gross domestic product rose only 1.1 percent in the first quarter this year, after a meager 1.4 percent increase in the fourth quarter of 2015.

Economists expect GDP to improve in the second quarter and the rest of the year, but are only predicting modest gains of 2 to 2.5 percent.

“We continue to muddle along,” said Michael Knetter, Ph.D, an economist and the president of the University of Wisconsin Foundation. “It continues to be a little bit of a surreal situation, with these interest rates being so low.”

The economic expansion following the Great Recession has been long, but unusually weak.

“This may turn out to be the new normal, having this 2 percent, 2.5 percent growth rate on average,” said Dr. Abdur Chowdhury, professor of economics at Marquette University.

“It’s just going to chug along at 2 to 2.5 percent, is what it seems like,” Knetter said. “I don’t see anything that’s going to spark breakout growth.”

But Steve Rick, chief economist for Madison-based CUNA Mutual Group, said he prefers to focus on the “steady” pattern of the U.S. economic expansion cycle and describes its growth rate as “modest.”

“It’s not slow,” Rick said. “We are approaching full employment in this country.”

The recovery has been modest because American consumers built up so much debt from 2005 to 2007, it has taken years for them to deleverage, so more spending went to pay off debts instead of to purchase goods, Rick said. But now that many consumers have reduced their debts and unemployment is low, consumer confidence is rising, he said. The Conference Board’s consumer confidence index rose to 98.0 in June, the highest level since October 2015.

At the same time, there is a pent-up demand for U.S. consumers to purchase cars and durable goods like refrigerators, washers and dryers, Rick says. Many consumers put off those major purchases while they deleveraged, but will need to replace aging cars and appliances.

Many economists and business leaders are wondering when the U.S. Federal Reserve will again raise interest rates, and how that would affect the economy. The Fed raised interest rates by a quarter of a point in December, the first increase in nine years, but has lacked enough confidence in the economy since then to increase rates further.

Knetter and Chowdhury said they don’t expect another interest rate hike at least until after Election Day in November. An interest rate increase would raise the risk of a recession, Knetter said.

Knetter said he does not expect a recession to occur by the end of 2016, but that chances for a recession in 2017 are “50-50.”

Chowdhury says he does not expect a recession for at least the next 12 months.

Rick said he doesn’t expect a recession until at least 2018.

“There’s still a lot of pent-up (consumer) demand,” he said.

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Andrew is the editor of BizTimes Milwaukee. He joined BizTimes in 2003, serving as managing editor and real estate reporter for 11 years. A University of Wisconsin-Madison graduate, he is a lifelong resident of the state. He lives in Muskego with his wife, Seng, their son, Zach, and their dog, Hokey. He is an avid sports fan and is a member of the Muskego Athletic Association board of directors.

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