U.S. Outlook for 2016.

• Author: Witte, Willard E.

A year ago, I was upbeat about the recent behavior of the U.S. economy, which I felt had finally broken out to the upside from its postrecession 2 percent slog. Although there were risks, I was optimistic about the outlook for 2015. Foolish me. The "improvement" during 2013 now seems to have been an illusion, and 2014 was weaker than it originally appeared. It now looks like 2015 will struggle to register 2 percent growth, nearly a full percentage point below our year-ago expectation. There may be a little improvement in 2016, but it is likely to be modest.

So, what went wrong? Three major things:

First, the U.S. Bureau of Economic Analysis revised the data. Growth in output (real GDP, shown in Figure 1) was lowered significantly for 2013 and rearranged for 2014 with spending by households on consumption being raised, and the growth rate for residential investment (housing) more than doubled. This was offset by lower estimated growth from business investment and from government.

Second, the international situation has been a significant negative. The slowdown in Chinese growth is driving a general slowing in growth throughout emerging economies. That, together with a dramatic appreciation in the dollar caused in part by financial instability in China, has severely hampered our exports. We expected the trade balance to be a small positive during 2015. Instead, it has been a large negative.

Third, oil prices fell far more than we anticipated, and this proved to be a net negative. In particular, investment and employment in the energy sector have fallen drastically. Part of this (but only part) was offset by a positive effect on consumption. Domestic crude production has started declining. (This is another source of pressure on the trade balance--less production means more imports.)

As 2015 wound down, recent data were discouraging, with a few exceptions. Output in the third quarter increased at an annual rate of just 1.5 percent, less than half of the second quarter rate. The manufacturing sector has been sputtering, with little if any growth, and orders for new capital goods have been especially weak. In both cases, the strong dollar is producing a strong headwind. The 2015 labor market over the past three months (through October) saw average job increases of 187,000 per month. This is down over 40 percent from the rate at the end of 2014.

There are a few brighter spots. Consumer spending is good, with auto sales especially strong. Housing...