Year in Review: 2016

By: Dr. M. Ray Perryman
Published in syndication January 04, 2017

In some ways, 2016 was a tumultuous year. It will likely be remembered for a divisive Presidential election, but also a record high stock market. Terror attacks in several nations, but global enjoyment of the Olympic Games. For the economy, 2016 brought both continued improvement and notable changes, including long-awaited decisions from the Federal Reserve and OPEC.

According to the Bureau of Labor Statistics, the US economy added 156,000 new net jobs in December. The average monthly job growth during 2016 was 180,000, lower than the 2015 average of 229,000 and the 2014 average of 251,000. However, this pattern is quite common as an expansion matures. Overall, the economy has added 2.16 million jobs in 2016. All of these gains were seen in the service-providing sectors, as the goods-producing sectors ended the year with a net job loss of 23,000 jobs. This loss can be attributed to the manufacturing as well as mining and logging sectors, although growth in construction helped to offset those losses and goods producers as a whole have added jobs overall since August. In the services-providing sectors, which added 2.18 million jobs over 2016, the largest gains were in education and health services and professional and business services, which saw an increase of 593,000 and 522,000 jobs over the past year, respectively. It is worthy of note that the economy has now had 75 consecutive months of job growth, the longest streak since 1939.

The unemployment rate rose slightly to 4.7 percent in December (from 4.6 percent in November) but is down from 5.0 percent last December. The number of long-term unemployed has declined by 263,000 in 2016 to 1.8 million, accounting for 24.2 percent of the unemployed. The number of involuntary part-time workers (those who would prefer full-time employment but have only been able to find part-time work) has fallen by 459,000 over the past year to 5.6 million.

Although employment growth was lackluster at the beginning of 2016, the continued strength in the labor market since mid-year has been an important indicator for the Federal Open Market Committee of the Federal Reserve System (the Fed). Citing the improving labor market as well as moderately rising household spending and slightly increased inflation, the Federal Reserve approved an interest rate hike in mid-December, making it the second interest rate hike since the federal funds rate was cut during the aftermath of the 2008 recession. The unanimous decision came along with stronger optimism over future economic conditions, including the economy moving even closer to full employment and inflation reaching the desired 2 percent level over the medium term. Even the Fed's expectations for GDP growth have recently been increased slightly to 2.1 percent in 2017 (our forecast is modestly higher).

The Fed also indicated in their latest statements that the Committee foresees three increases in 2017, a number which has surprised some market analysts and, of course, could well be modified if conditions change. Regardless of the exact number of rate changes in 2017, the Fed is committed to only gradual increases that will be driven by incoming data throughout the year rather than a set schedule. For perspective, in 2016, many predicted that the Fed would raise rates three times, but the central bank only just now raised rates once due to unexpected intervening factors, such as the lower economic activity of the first half of 2016, uncertainty over Brexit, and lower inflation (in part due to lower energy prices).

The record-low oil prices of 2016 could become a thing of the past as energy prices are already responding to a production cut that was agreed upon by OPEC (the Organization of Petroleum Exporting Countries) at the end of November and other oil-producing nations shortly thereafter. The member nations, with the exception of Nigeria and Libya which are still recovering from production interruptions, have agreed to cut crude oil production by 1.2 million barrels per day beginning in this month. Russia, a non-OPEC member, announced it would cooperate as well and lower production by 300,000 barrels per day. Oman, another non-OPEC member, has also indicated that it will cut its crude oil volumes by 5 percent. While any production agreement is only important if it is actually enacted, thus far it appears that the nations will live up to their agreement. For example, there are signs that Kuwait and Oman are already implementing their production cut of about 175,000 barrels per day.

While some of the details for 2017 have been filled in, it is mostly still up in the air (much as life always is). There is also still a lot of uncertainty over the Trump Administration (which does not neatly fit in any historical boxes) and its policies, various conflicts around the world, and several other topics. Even so, individuals, businesses, and markets appear to be reacting optimistically, and there is reason to believe that economic expansion and oil price recovery will continue well into the New Year.