Wage Gains, Construction and Corporate Profits Generate a Healthier Economy

The economic forecast calls for a healthier 2016 as a number of factors come together to fuel greater consumer and corporate confidence.

Phillip Perry

Why the spike in construction? The nation’s inventory of new homes has been falling steadily, says Koropeckyj, to the point where builders are now expected to perceive solid economic benefits in gearing up into higher production.

The decline in inventory over the past year came about as builders held back from constructing new homes, concerned that consumer demand had not met expectations. That demand, in turn, was soft because, says Koropeckyj, “many young families saddled with mountains of student debt were opting to continue renting.”

Corporate Profits Good News

Sales prospects also benefit when large employers enjoy good profits. Healthy earnings stimulate business expansion, an activity which requires investment in buildings and equipment. That generates still more business for suppliers, along with more employment and disposable income for consumers.

In this area, again, the future looks rosy. “Corporate profit growth is expected to accelerate some 9.2 percent through 2016,” says Koropeckyj. That’s a considerable improvement over the results for 2015, when profits actually declined slightly as a result of the strong dollar (which weakened exports), and a decrease in energy revenues following a drop in commodity prices.

Moody’s is looking to a recovery in global economies, along with a diminished drag from the dollar, to help turn things around. Again, though, several factors could cause a delay. “Our narrative rests on the assumption that wages and productivity will rise in lockstep,” says Koropeckyj. “But this may not hold. Productivity growth has been weak, allowing even modest wage gains to push unit labor costs higher.” Wage growth is likely to grow faster than productivity. “This would further compress margins and lower the outlook for corporate profits.”

Manufacturers Making Hay

Of special importance to retailers and resellers is one subset of the larger corporate world: manufacturers. Any growth in that sector has a dramatic effect on employment, since the sector is heavily dependent on a skilled labor force.

Again, it seems that manufacturers are looking ahead to a 2016 that will match or excel what has been a reasonably good 2015. “Conditions are positive but are not robust or booming,” says Tom Palisin, executive director of The Manufacturers’ Association, a York, Pa.-based regional employers’ organization with more than 370 member companies. “Manufacturers are doing slightly better than they were a year ago. They are reporting low to moderate growth, solid orders, and a good backlog.” Low energy prices are favorable for the sector.

Looking to 2016, Palisin says his members are “cautiously optimistic.” A telling indicator of that optimism is a new move to prepare for expansion. “One significant change is a move by many companies to invest more in their training budgets,” says Palisin.

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Manufacturers are doing so, he says, in response to a number of conditions: an improving economy, several years of cost cutting that has led to a lean work force, and a lack of available skilled talent along with low unemployment. “Employers now seem more eager to retain the employees they have by investing in training of their existing workforce.” That will translate into higher salaries and still more disposable income in consumers’ wallets.

Manufacturers will be helped by a growing availability of credit, which has loosened considerably since the tight years of the great recession. “Rates are low and banks are willing to invest,” says Palisin. “However, there has not been much demand for commercial loans because many companies have sufficient cash on hand to finance their growth needs.” Others, he says, have delayed capital investment due to economic uncertainty and a tough regulatory environment.

Always Some Dark Clouds

Of course, challenges remain. Businesses should keep an eye out for further developments in lingering issues such as the softening of European and Chinese economies, a volatile American stock market, and political gridlock in Washington. “Businesses prefer stability and consistency,” says Palisin. “And right now we have anything but that.”

Even so, signs point to continuing market strength. “We think the economy should weather the current uncertainties,” says Moody’s Hoyt. He points to the improving employment picture as the key. “A lot of our optimism centers on the strength in the labor markets.”

A healthy jobs picture, then, should make all the difference in 2016. “Early in the year retailers should watch what is happening with wages,” says Hoyt. “If the labor market tightens as expected, that will lead to higher wages and more consumer spending.”

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