WASHINGTON, Jan. 6, 2016 — The economy slowed in the last half of 2015. Recent data indicate that the economy may be slowing further. This week, the stock market tanked, and the last part of the employer mandate to provide health insurance for all employees kicked in.
It has been six and a half years since the last recession ended. Will 2016 see another recession?
The consensus view is that the economy will grow by 3 percent in 2016, but a 3 percent growth rate has been forecast every year since 2010. Each year ended with growth just above 2 percent. The forecast for this year may be optimistic, and some signs point to recession.
The manufacturing sector is slowing, hurt by declining demand both in the U.S. and abroad. While exports represent a small portion of GDP, the slowdown in exports, due to weakness in most world economies, will put a drag on economic growth. Exports will further decline because of the strengthening dollar, which makes American exports more expensive to foreign countries. The strong dollar also means that imports will be cheaper, encouraging Americans to purchase foreign goods instead of American-made goods, further slowing economic growth.
The Federal Reserve will make this problem worse; as the Fed raises interest rates and other central banks lower theirs, the dollar will strengthen further. The Fed raised interest rates slightly last month and is likely to raise rates two or three times during 2016.
The dramatic decline in the stock market this week could have been caused by a number of factors. If investors believe that corporate profits will decline this year, then many stockholders will want to sell, and those who buy will offer a lower price. The decline in the stock market could mean investors believe the economy will slow, which means they expect lower corporate profits. If the economy slows enough, a recession will follow.
Small business accounts for the vast majority of new jobs. While the overall unemployment rate is a very low 5 percent, the U6 unemployment rate, which includes discouraged workers and workers finding only part time jobs, is 10 percent. The Obama administration often boasts about the number of new jobs created in recent years. The reality is that most of those jobs are low-paying or part-time.
Since the final part of the Affordable Care Act’s employer mandate kicks in this year, it will be more expensive and thus more difficult for small business to add new workers. Couple this with rising minimum wages in many states—some as high as $15 per hour—and the barriers keeping small businesses from adding new jobs will rise.
If a small business wants to hire an unskilled worker—that is, a worker with absolutely no skills—the cost is prohibitive. At a minimum wage of $15 per hour, wages alone will cost the employer $31,000 per year. Add in the $1,800 the firm has to pay for its share of the Social Security tax and then the cost of the employer mandate, which is a minimum of $3,000 per year, and the total cost to hire a worker with absolutely no skills is about $36,000 per year.
In a weak economy there will be no demand for unskilled workers who cost $36,000 per year. This will slow economic growth.
The conflict in the Middle East is escalating to the point where countries are starting to take sides. Saudi Arabia and other Sunni countries have severed ties with Shiite Iran, which has partnered with Syria and Russia. It is difficult to predict the outcome of any conflict that may evolve, but whatever happens, it will have a negative impact on economic growth.
Forecasting economic activity is as much an art as it is a science. Reliable forecasts depend on hundreds of variables, numerous assumptions and vast quantities of data. However, the economy moves in cycles, and the last recession ended more than six and a half years ago, which exceeds the average time between recessions. Take that with the other factors mentioned here, and the odds of a recession this year look good.