An observer of the political scene recently said, "I try to be cynical, but I just can't keep up." As an economic prognosticator, I feel a little the same. I try to be pessimistic (or at least not optimistic), but I just can't keep up.
Two years ago, our forecast for 2015 had the economy breaking out of its "2 percent slog" to growth of nearly 3 percent. The actual number was 1.9 percent (fourth quarter to fourth quarter). A year ago, looking ahead to 2016, we saw "little reason for any real optimism," but we did think growth would reach about 2.5 percent, thus surpassing 2015. It now looks like 2016 will struggle to reach even 2 percent. Over the first three quarters, real GDP has averaged just 1.8 percent (see Figure 1).
So, what went wrong? Nothing really dramatic. First, the business, housing and government sectors all underperformed relative to our expectations. We had expected business investment to increase at a 3.7 percent rate, building on improving growth in 2015; instead (based on the first three quarters of 2016), it collapsed to -0.8 percent. Housing was similar--expected growth of 5.8 percent turned into an actual decline of -1.7 percent. Government was less dramatic, with actual growth below 0.1 percent versus our forecast of 0.8 percent. In total, these three sectors pulled output down by almost 1 percent relative to our expectation. (Exports would also have underperformed except for a huge third-quarter jump in soybeans exports. This alone added as much as a quarter point to overall Q1-Q3 growth.) However, consumption offset some of these shortfalls--consumption has grown at a 2.9 percent rate, a little above our forecasted 2.5 percent.
Output in the third quarter of 2016 increased at an annual rate of 3.2 percent. This was better than the 1.1 percent average for the first half of 2016. However, an increase in inventories and the soybean factor mentioned above accounted for about 1 percent of that third-quarter advance.
In the labor market, the economy added 161,000 jobs in October (see Figure 2). For the first 10 months of 2016, the monthly average was 181,000. This is significantly below the average of 229,000 for all of 2015. The unemployment rate in October was 4.9 percent, essentially unchanged from the beginning of the year.
Overall, 2016 must be rated as mildly disappointing. Growth has been weak, but that is nothing new. It is a continuation of the pattern of the previous six years. Job creation has slowed and the...