How will businesses fare in 2016? According to experienced marketplace watchers, very well. After several years of gradual progress, the economic stars are aligning in favor of a more robust commercial environment.
“We expect 2016 will be a good year, with increased consumer spending driving economic growth,” said Sophia Koropeckyj, managing director of industry economics at Moody’s Analytics, a research firm based in West Chester, Pennsylvania.
Why the sunny outlook? Economists point to a number of conditions favoring businesses like higher employment, lower consumer debt, greater credit availability, trimmed gasoline prices and an overall robust American economy.
The most important contributing factor to a robust marketplace, Koropeckyj said, is the growing health of the labor force.
“Wage gains are now materializing across a number of industries and regions,” Koropeckyj said.
That means consumers, a critical driver of the American economy, will have more disposable cash to spend.
According to Moody’s, unemployment fell to 5.1 percent in late 2015, a full percentage point decline over the level 12 months previous and a rate nearly synonymous with the 5 percent economists believe represents a condition of full employment.
“While there is still slack in the labor market, it is declining quickly,” said Scott Hoyt, senior director of consumer economics for Moody’s. “At some point in 2016, the labor market should become tight, which should translate into faster growth in wages and consumer spending.”
Indeed, Moody’s expects the nation to reach full employment by mid-2016, and the average unemployment rate during the fourth quarter of the year to be 4.8 percent.
Gains in employment nationwide have helped create a population more confident of the future and, therefore, more prone to spend.
“The consumer has been feeling reasonably well,” said Walter Simson, principal of Chatham, New Jersey-based Ventor Consulting. “Baby boomers, especially, are feeling not too bad.”
And economists expect consumer confidence to continue to rise over the coming 12 months in response to a brighter employment picture.
Stronger Economy
So just how good is “good” for 2016? The answer depends on how much consumers and businesses spend nationwide on goods and services over the course of the year. The faster the rise in the Gross Domestic Product (GDP), the healthier the economy.
For 2016, Moody’s expects GDP to grow 3.25 percent. That’s considerably higher than the expected 2015 rate of 2.5 percent (which is the American economy’s average historic growth rate over the years). The 2015 results, to be confirmed when the year’s sales numbers are finally tallied, were slightly higher than 2014’s 2.43 percent growth rate.
One big driver of the rise in GDP is expected to be an improving performance by large employers. Businesses of all sizes benefit when major corporations rack up healthy profits. Good earnings stimulate business expansion and an attendant investment in buildings and equipment. That generates more business for suppliers, along with more employment and disposable income for consumers.
In this area, again, the future looks rosy.
“Corporate profit growth is expected to accelerate some 9.2 percent through 2016,” Koropeckyj said.
That’s a considerable improvement over the results for 2015, when profits declined slightly as a result of the strong dollar (weakening exports) and a decrease in energy revenues following a drop in commodity prices.
Why the rebound? Moody’s is looking to a recovery in global economies, along with a diminished drag from the dollar, to help turn things around. However, several factors could cause a delay.
“Our narrative rests on the assumption that wages and productivity will rise in lockstep,” Koropeckyj said. “But this may not hold. Productivity growth has been weak, allowing even modest wage gains to push unit labor costs higher.”
Wage growth is likely to grow faster than productivity.
“This would further compress margins and lower the outlook for corporate profits,” Koropeckyj said.
Making Hay
Of special importance to all businesses is the performance by one subset of the larger corporate world — manufacturers. Any growth in that sector has a dramatic effect on employment and thus on the economy in general, since manufacturing is heavily dependent on a skilled labor force.
Again, it seems manufacturers are looking ahead to a 2016 that will match or exceed what has been a reasonably good 2015.
“Conditions are positive but are not robust or booming,” said Tom Palisin, executive director of The Manufacturers’ Association, a York, Pennsylvania-based regional employers’ organization with more than 370 member companies. “Manufacturers are doing slightly better than they were a year ago. They are reporting low to moderate growth, solid orders and a good backlog.”
Low energy prices are favorable for the sector.
Looking to 2016, Palisin said his members are cautiously optimistic. A telling indicator of that optimism is a new initiative to bolster the workforce.
“One significant change is a move by many companies to invest more in their training budgets,” Palisin said.
Manufacturers are doing so, he said, in response to a number of conditions: An improving economy, several years of cost cutting that has led to a lean work force and a lack of available skilled talent along with low unemployment.
“Employers now seem more eager to retain the employees they have by investing in training of their existing workforce,” Palisin said.
That will translate into higher salaries and still more disposable income in consumers’ wallets.
Manufacturers will be helped by a growing availability of credit, which has loosened considerably since the tight years of the great recession.
“Rates are low, and banks are willing to invest,” Palisin said. “However, there has not been much demand for commercial loans because many companies have sufficient cash on hand to finance their growth needs.”
Others, Palisin said, have delayed capital investment due to economic uncertainty and a tough regulatory environment.
Housing Rebound
Businesses depend on a healthy economy to support strong sales. And one of the most important drivers of a healthy economy is a robust housing construction sector, which employs more people and generates more disposable income.
“The ever-tightening market for new homes will likely spur stronger construction activity in 2016,” Koropeckyj said.
Indeed, housing starts are expected to rise 29.5 percent for the year, a considerable improvement over the 14.5 percent figure expected for 2015 when final numbers are tallied. (The rate for 2014 was 5.8 percent.)
Why the spike in construction? The nation’s inventory of new homes has been falling steadily, Koropeckyj said, to the point where builders are now expected to perceive solid economic benefits in gearing up into higher production.
The decline in inventory over the past year came about as builders held back from constructing new homes, concerned consumer demand had not met expectations. That demand, in turn, was soft because, according to Koropeckyj, many young families saddled with mountains of student debt were opting to continue renting.
Granted, some conditions will have to be met before the housing rebound occurs.
“The tightening housing market by itself does not guarantee a resumption of single-family construction,” Koropeckyj pointed out. “Household debt burdens will still have to fall significantly before younger families that are potential buyers of new homes start to return to the market in strength. Even so, the U.S. recovery, with some outside help from low gasoline prices and consequently low inflation, is pulling that date forward.”
The expected housing rebound should have a related effect, a moderation in home prices. They are expected to increase by only 2.9 percent in 2016, a deceleration of the 6.3 percent expected for 2015.
Retail Growth
Performance in the retail sector is yet another critical driver for the American economy in general. And here, again, economists see an improving picture in 2016.
“We expect core retail sales to grow 5.5 percent in 2016,” Hoyt said.
That’s notably faster than the 4.2 growth rate anticipated when 2015 sales are finally tallied. The 2015 experience was slightly better than the 3.9 percent growth of 2014.
If Moody’s is accurate, businesses can rejoice, as the anticipated rate is not far off the roughly 6 percent increases retailers commonly enjoyed during the robust decade of the 1990s, as well as the period they fondly remember just prior to the great recession.
What will drive the anticipated retail sales increase? Primarily higher wages, fueled by the growing number of people gainfully employed.
Dark Clouds
Challenges remain. Businesses should keep an eye out for further developments in lingering issues such as the softening of European and Chinese economies, a volatile American stock market and political gridlock in Washington.
“Businesses prefer stability and consistency,” Palisin said. “And right now we have anything but that.”
Even so, signs point to continuing marketplace strength.
“We think the economy should weather the current uncertainties,” Hoyt said.
Hoyt pointed to improving employment figures as the key.
“A lot of our optimism centers on the strength in the labor markets,” Hoyt said.
A healthy jobs picture should make all the difference in 2016.
“Early in the year businesses should watch what is happening with wages,” Hoyt said. “If the labor market tightens as expected, that will lead to higher wages and more consumer spending.”
Good news, banks are flush with money and eager to lend.
“Credit is more available than any time since the great recession,” said Walter Simson, principal of Chatham, New Jersey-based, Ventor Consulting. “A more liberal lending environment has opened a window of opportunity for small business owners to get more capital with less risk.”
You are in the driver’s seat because commercial and community banks are more willing than ever to negotiate terms.
What should you do? Simson advised if you already have a favorable loan contract then negotiate to lock it in for additional years.
“This is a good time to extend your loan agreement for as long as you can,” Simson said.
Second, consider negotiating for a better deal.
“If you are in the mood to get better terms, this is the time to do it,” Simson said. “You may be able to get more credit for longer periods at a lower interest rate.”
And that’s not all, dig deep into your loan contract’s fine print to spot nettlesome provisions that can be modified. Perhaps you can modify loan covenants that require your business to maintain specified parameters such as a minimum net worth or cash flow. You might also be able to eliminate clauses that require you, or a sister company, to guarantee the loan, or which hold your personal home as collateral.
Look for language that allows the bank to call the loan if there is a material adverse change in your business operation.
“These clauses are commonly seen when money is hard to get,” Simson said. “While it would surprise me to see them occur in new loan agreements, such clauses might still be in force for loans made back in 2009 or 2010.”
One last tip: try to root out any language that indicates the bank is lending at its discretion. Such clauses might allow your bank to call your loan, or to change its terms, at any time for any reason.
What if your banker won’t budge? Keep in mind an environment with liberal lending policies rewards people who shop around.
“Go across the street to another lender,” Simson said. “Chances are you will be accommodated.”
