David Mitchell is watching the Federal Reserve’s moves, historically low oil prices and consumer trends shape the economy.
2016 Projection The U.S. gross domestic product will increase by 2.5 percent, and the Fed will raise the prime rate to at least 4 percent.
SBJ: What is your reaction to interest rates moving up in December?
David Mitchell: I think it’s a return to normalization, and I think it should have been done long ago. If the economy is really so bad that a quarter-point increase sinks it, then it’s in really bad shape. A quarter-point is just not much.
I’m thinking we’ll see two to four more rate increases for the year, maybe a quarter-point each. You could reasonably assume they’ll be between three-quarters of a point and 1.25 [percent]. But I think it’ll be very gradual.
SBJ: What’s the immediate impact of the prime rate hike to 3.5 percent?
Mitchell: In one way, the ratcheting up of interest rates makes people who were waiting to pull the trigger say, “I’m going to go ahead and build now before they get to 6 or 7 percent,” which is years and years away. In that respect, I think raising rates encourages people to start doing that.
SBJ: What will be the main factors in economic growth this year?
Mitchell: People have been waiting for the return of this 3, 3.5 or 4 percent growth because we’ve been stuck at this 2 percent for a while, but I think they’re starting to realize that 2 or 2.5 percent is the new normal. That’s extremely unfortunate, but that’s what it is. I think it’s demographically driven, partially, because the baby boomers are retiring. They are buying a different set of goods and services than other people did. People in their 60s don’t typically go out and buy a large house. They’re actually doing the exact opposite. They’re selling their large houses and buying smaller houses. They’re downsizing. You see apartments going up everywhere. There’s a huge boom happening in multifamily housing that you don’t see with the single-family. So, I think it’s mostly demographically driven, though I do think there have been some economic policies put in place that have made it more difficult to hire people and easier to hire part time instead of full time.
SBJ: How will the presidential election impact business?
Mitchell: It depends on how much of a difference we have in economic policies between the Democratic candidate and the Republican candidate. That might make people sit back on the sidelines for a while. If what the Republican candidate and Democratic candidate are saying is essentially the same, then you might as well pull the trigger on spending or investments.
SBJ: Personal savings rates increased to 5.5 percent of income in 2015, according to the U.S. Bureau of Economic Analysis. Should we expect more of the same during this election year?
Mitchell: I think it depends on the candidates. If Bernie Sanders is going to be the candidate – Bernie Sanders is clearly not a fan of business. If you are a businessman and Bernie Sanders looks like he might win, that might give you some pause on investment because it’s guaranteed that higher tax rates are coming; and policies that make workers more expensive to add – it’s almost a guarantee. On the Republican side, there are so many candidates, it’s hard to tell who will come out ahead right now, and they are all kind of spouting different policies. That’s less clear. Hillary [Clinton] is probably more pro-business than Bernie Sanders is, but I doubt she’s as pro-business as what a conservative candidate might look like.
SBJ: What do you expect in GDP growth?
Mitchell: I think we’ll be in the 2.5 percent range. I don’t see anything that would make it any larger than that. That’s the new normal. If we get above that into the 3 percent range, that would be extraordinary. Ten or 15 years ago that would have been normal. The stock market has basically gone sideways all year. There’s been almost no growth in it whatsoever. Typically when you have a sideways year like that, you’ll have growth in the next year. The interesting thing about oil prices is I don’t see it going back to $80 a barrel or $90 a barrel anytime soon.
SBJ: If oil is staying in that $40- $50- or $60-price per barrel range, would that help GDP grow 2.5 percent instead of maybe 1.5 percent or 2 percent?
Mitchell: I think so. And the interesting thing is, of course, when it is at $147 per barrel, it helps the people in the oil industry. They’re making money hand over fist; they’re hiring employees and buying steel and doing all these other things. And when it’s cheap, those people are hurt and other people are helped. But I think the segment that’s helped by lower oil prices is larger than the segment that is helped by higher oil prices.
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