2016 Economic Environment in Review


  • While oil prices began to stabilize in 2016, we do believe the price per barrel has the potential to rise in 2017 and may accelerate inflation.
  • The Federal Reserve (Fed) stayed on the sidelines for much of 2016, requiring an updated forecast of only one rate hike for the year.
  • We maintain that in 2017 we see low odds of a recession in the U.S., as we expect growth to accelerate modestly.

"The man who makes no mistakes does not usually make anything."– Edward John Phelps

This week we take a look back at some of our hits and misses of 2016. We certainly had some of both in a year that had some unusual macroeconomic drivers, including the impact of low oil prices at the beginning of the year on several sectors of the economy, slower-than-expected economic growth, and the Federal Reserve (Fed) and markets cautiously moving closer to consensus after starkly different expectations on the path of rates early in the year. Nevertheless, we also had a good read on some of the basic forces in play in the economy. Against this backdrop, we look at what we got right and where we missed in 2016 and the lessons learned going into 2017.


“Looking ahead to 2016, if oil prices move up as we expect, the goods portion of CPI may increase by 2–3%; and if the pace of service sector inflation remains between 2% and 2.5%, overall CPI will accelerate quickly and may be well over 2.0% by year-end.”

“We believe that oil prices may begin to stabilize in 2016 with a bias to the upside as supply and demand continue to move into balance.”

Outlook 2016: Embrace the Routine (November 2015) Looking back, oil prices did move up from the low $40/barrel level seen as our Outlook 2016 was published in late November 2015, but not before crashing to the mid-$20/barrel in early 2016. Oil prices today sit at just under $52/ barrel, but goods prices (as measured by the Consumer Price Index [CPI])—though they did accelerate sharply in the second half of 2016—posted a 0.5% year-over-year decline as of November 2016. Driven by higher housing and medical costs, service sector inflation in 2016 exceeded our expectations, posting a 3.0% year-over-year reading as of November 2016, moving from just 0.4% year over year in late 2015 to the 1.7% reading in November 2016.

Looking ahead, if oil and gasoline prices stay in their recent ranges, the CPI for commodities will turn positive in early 2017 — for the first time since 2014 — and push overall CPI above the Fed’s 2% target. We expect oil prices to potentially move modestly higher in 2017 from current levels, based on the recent global production cut agreement and improving global economic growth, which should accelerate the timetable to balance supply and demand.


Economy: 2.5–3% Growth

Manufacturing, business capital spending, and net exports are expected to take larger roles in U.S. economic growth, with continued support from consumer spending.”

Outlook 2016: Embrace the Routine