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What to Watch in the Economy in 2016

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The economy will enter the election of year of 2016 with good momentum, and there are a number of reasons to believe it will continue to improve, according to the new edition of Business Conditions Monthly, out today from the American Institute for Economic Research.

There are also two main factors that could present obstacles to that continued growth, said Bob Hughes, senior research fellow at AIER, and the lead author of the report.

The first, he said, is Fed policy. In the past, when the Federal Reserve Bank has raised rates too quickly, it has pushed the economy into a recession, Hughes said. Rate increases can also cause volatility in capital markets, he said. A small single rate increase, like the one we are likely to see on Wednesday, would be unlikely to damage the expansion on its own, he said.

“We know they’re going to go cautiously. Just how cautiously, that’s one of the big unknowns,” Hughes said.

The second is the global economy. A strong dollar and weak global growth has restrained U.S. exports, Hughes said. If that were to continue, the U.S. would be more dependent on domestic factors like consumer spending, the housing market and business investment, Hughes said.

“Right now it looks like we’re a bit of an island,” Hughes said. The U.S. is one of the stronger parts of the global economy, with 2.8 million added jobs in the last 12 months, unemployment down to 5 percent, good corporate balance sheets, early signs that wages could be accelerating, and consumer confidence benefitting from low energy prices, he said.

“We’ve got a solid foundation for consumer spending,” Hughes said.

Business Conditions Monthly also includes its forecast for recession. AIER’s economic outlook is still showing continued low risk of recession in the United States. For the most recent month, November, the proportion of AIER’s leading indicators deemed to be expanding was 56 percent, up from 50 percent in October. November marks the 75th consecutive month at or above the neutral level of 50 percent.

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