The U.S. is set to end 2016 with close to 1.5% average GDP growth for the year. Although 3Q 2016 growth was strong at 2.9%, the two prior weak quarters will drag the annual average down notably. Most analysts are projecting GDP growth to decline to 2-2.5% in 4Q.

The rebound in growth in the second half is impressive given weak global growth (2.2% for 2016) and the uncertainty of the presidential election, but 1.5% growth in 2016 is still a big drop off from 2.6% in 2015.

Although the crystal ball is certainly clouded with conflicting data, strong Q4 data would go a long way in confirming that the current U.S. economic growth rate is sustainable.

3Q US Economic Data Solid

Note that, in a surprise, business spending on inventories moved up in 3Q. The fact that business confidence is not slipping despite the uncertainty relating to the election and increasing global tensions is a very good sign.

Consumer spending also moved up by 2.1% in the third quarter. Motor vehicle purchases were up 3.8%, but this is likely just a one or two quarter spike related to sales incentives and seasonal factors. Businesses reduced equipment purchases slightly, but boosted spending on new buildings. Federal spending was up, but state and local government spending was flat.

Shoots of Growth

One positive sign for the economy is that a solid trend of job and wage gains is giving Americans more disposable income to spend to keep the economy running. The housing market also seems to be on the mend, at least regionally, which augurs well for U.S. growth in the next few quarters.

It also seems probable business investment will show more strength after the current topsy-turvy election cycle is in the books.

The largest cohort of analysts and economists are forecasting GDP growth in 2017 will come in ballpark 2%. The recent track record of most of this group is not high, however, as the fits and starts of the economy over the last few years have confounded logic and economic models.

Notable Headwinds

One of the biggest headwinds to further growth in the U.S. economy is anemic exports as foreign growth rates have been and are likely to remain slow.

The distinct possibility that the Fed will finally pull the trigger on a series of rate hikes is also a consideration. Rate hikes increase the cost of doing business and act as a brake on economic activity.

The value of the dollar may also increase as the Fed starts to crank up a series of rate hikes, which may further exacerbate current weak exports.

Is 2% Economic Growth Enough?

Multi-billionaire Warren Buffett supports the U.S. Federal Reserve’s current goal of around 2% economic growth. Buffett argues that 2% growth is pretty good when you consider compounding.

In reference to 2% U.S. GDP growth, he notes, “If you already have an already prosperous economy, and we have one of the most prosperous in the world, and you keep compounding it over time, people will be living far better 20 years from now than they are now.”

The general consensus among mainstream economists is that 2% to 4% economic growth is the “sweet spot.”

However, a report from the Boston Consulting Group suggests that the economic system is changing structurally, and that slow 1% to 2% growth is not translating into improved quality of life for most citizens in developed countries. The report notes that Germany and other Nordic countries are making good progress at converting greater wealth into well being for citizens, but that the U.S. and the rest of Europe are lagging in this process at current low-growth rates.

Although the BCG report does not provide details about the performance of specific countries, one could reason that the growing "wealth inequality" in the U.S. is behind the weakness in QOL improvement. That is, it’s because most of the new wealth created in the current low-growth economy is rising to the top 1% instead of being spread out.

 

Become the Best-Informed Investor You Know

The world is more interconnected than ever before. Only those investors who understand how current world events are linked can prepare for what’s going to happen. Sign up for Mauldin Economics’ free weekly newsletters for a bird’s-eye view of macroeconomic reality.

 

Want to learn how to invest?

Get a free 10 week email series that will teach you how to start investing.

Delivered twice a week, straight to your inbox.