3 Economic Challenges the U.S. Faced in 2016

According to the U.S. Bureau of Economic Analysis (BEA), total production in the U.S. economy grew at a 2% clip in the third quarter of 2015. In the second quarter, real gross domestic product (real GDP) was revised up to 3.7% growth. There are some problems with relying on GDP to gauge economic health, but these were still encouraging signs for a country fighting through the slowest post-recession recovery in its history.

Positive economic numbers only added to expectations about a potential interest rate hike by the Federal Reserve heading into 2016. The Fed had not raised interest rates since before the Great Recession.

A momentous 0.25% federal funds rate hike is only one challenge that the U.S. economy faced in 2016. Labor force participation was still historically low. Politicians continued to rack up enormous deficits and finance them with cheap credit. And the entire global financial system teetered because China’s economy finally slowed after years of ravenous growth.

The following are three challenges that American businesses and policymakers confronted in 2016.

Key Takeaways

• U.S. businesses and policymakers confronted three significant economic challenges in 2016.
• The Federal Open Market Committee (FOMC) raised the federal funds rate by 0.25% in December 2016, after holding steady as inflation remained below target.
• The struggles of the two largest foreign markets, Europe and China, affected the U.S. economy.
• The U.S. economy added jobs, but very few were full-time, productive jobs in the private economy.

The Fed’s Difficult Balancing Act

The Federal Open Market Committee (FOMC) openly toyed with the idea of raising interest rates beginning in at least 2012. The Fed likely did not raise them for much of 2016 because it was caught between a rock and several hard places.

There is ample historical evidence to suggest low interest rates fuel bond, equity, and housing prices. The opposite tends to occur when rates increase. The 2015 recovery was likely built on higher asset prices and lower energy costs. There were concerns that raising interest rates would not cause oil prices to jump, but would also drive down assets, turning the small recovery into a contraction.

Then again, interest rates couldn’t stay at zero forever. The economy had already suffered the terrible results of unchecked housing and stock market growth in 2007–2008, and the Fed did not want to double down on that mistake. Additionally, savers and retirees had been crippled by record-low payments on traditional income devices such as certificates of deposit (CDs) and bonds.

Just as critically, the federal government did not want rates to rise. First, the illusory growth from low interest rate policies was politically popular. Second, the United States had an enormous interest payment on the debt. These interest payments suddenly get much larger when the government has to issue new bonds with higher coupons.

In December 2016, the FOMC finally raised the fed funds rate by 0.25%.

Weakness in Europe and China

The U.S. is not immune to the ebbs and flows of a complex global economy, and the two largest foreign markets, Europe and China, struggled in 2016. When the Shanghai Stock Exchange Composite more than doubled from October 2014 to August 2015, many pronounced China as the economic superpower of the future. That optimism all but disappeared in a flash after Chinese equities fell by nearly 40% over the next two months, despite massive purchases of failing companies by the Chinese Security Finance Corp.

It turns out China had a real estate and stock market bubble that felt disturbingly similar to the American experience in 2007–2008. The “red economy,” seemingly impervious to a slowdown the year prior, seemed on the brink of a multiyear struggle.

News out of Europe was not much better. Recorded growth in the eurozone was just 0.5% in Q1 2015, and numbers were even worse for Q2 and Q3. Germany and the United Kingdom had been reluctantly dragging the rest of the continent out of the red for years, but economic and political concerns were numerous in the new year.

Sluggish Jobs Market

The U.S. economy added jobs each month in 2015. This is the good news. The bad news was that very few of those jobs were full-time, productive jobs in the private economy. The middle class was still struggling, and the economy did not seem well equipped to provide new, lasting, and high-paying opportunities.

Total government employment increased by more than 1.1 million from November 2014 to November 2015. Over the same time frame, over 500,000 jobs were added to an increasingly bureaucratic healthcare sector. And, as the November 2015 jobs report from the U.S. Bureau of Labor Statistics pointed out, “the number of persons employed part-time for economic reasons (sometimes referred to as involuntary part-time workers) increased by 319,000 to 6.1 million.”

The labor force participation rate was near decade-long lows all year, standing at under 63%. And, even though 211,000 jobs were added in November 2015, there were 2.3 million workers only “marginally attached to the labor force” or who were discouraged and not believing there were jobs out there for them. This means that, by a factor of eight-to-one, more people gave up looking for jobs than found them.

U.S. unemployment held steady for much of 2016 before falling 0.3% in Q4.

How Much Did the Economy Factor into the 2016 Presidential Election?

The economy was a top issue for voters in the 2016 U.S. presidential election, which Donald Trump won. According to a Pew Research Center survey in June 2016, 84% of registered voters said that the issue of the economy would be very important to them in deciding who to vote for.

What Was the Final Result for the U.S. Economy in 2016?

The U.S. economy grew by 1.6% in 2016, according to real GDP figures from the Bureau of Economic Analysis. This was a decline from a 2.6% increase in 2015.

What Challenges Will the U.S. Economy Face in 2025?

Challenges facing the U.S. economy in 2025 include:

• A shrinking trend of more job openings than people searching for work
• Two possible cuts to the federal funds rate, reflecting Federal Reserve recognition that the inflation rate is falling slower than expected and a possible hedge against new tariffs from the second Trump presidential administration
• Tax cuts, as promised by the Trump administration, that would keep the federal budget deficit high

The Bottom Line

American businesses and policymakers confronted three significant economic challenges in 2016. One was the Federal Open Market Committee (FOMC) toying with raising interest rates, before finally doing so in December 2016. The second was the struggles of the two largest foreign markets: Europe and China. The third was a sluggish jobs market in which very few of the jobs being added represented full-time, productive work in the private economy.