The following release was prepared by Wallace King and Charles Schaller on behalf of the 2016 Henry Fund research team. The team updates its economic outlook several times throughout each semester. This analysis forms the basis for class discussions, company selection, and investment research.
The Henry Fund research team’s September outlook for the US economy shows a decline in our projected 6-month real GDP growth to 2.0% down from our April consensus of 2.4%. Real gross domestic product increased at a revised annual rate of 1.1% in the second quarter of 2016. The GDP increase was driven by growth in personal consumption expenditures (PCE) and exports. The team’s long term GDP outlook remains relatively unchanged at 2.3%.
The CPI inflation rate for July declined by 0.2% but was unchanged on a seasonally adjusted basis. July’s CPI decline was driven by a 1.6% reduction in the energy index due to falling oil prices. The change in CPI for the past 12 months of 0.9% is still significantly below the FED’s targeted rate of 2.0%. The suppressed inflation rate has been driven in large part by low oil prices, as the energy index has declined by almost 11% in the past year. The Henry Fund research team expects the inflation rate to increase at 1.0% over the next 6 months and to 1.75% over the next 2 years.
The unemployment rate fell to 4.9% in July 2016 from 5% in April 2016. The reduction in the unemployment rate was driven by gains in non-farm payroll employment. Nonfarm payrolls rose from 11,000 to 287,000 between June and July. Employment gains occurred in professional and business services, health care, and financial activities while jobs in mining continued to decline. The research team expects the unemployment rate to remain flat at 4.9% over the next 6 months before declining to a long term rate of 4.8% in two years.
The FOMC left benchmark interest rate unchanged at 0.25% to 0.50% in both the June and July meetings. The decision to leave rates unchanged in June was driven in large part by the economic volatility caused by the U.K. referendum on leaving the EU (BREXIT) and the University of Michigan’s survey predicting lower than expected inflation. At the July meeting, the FOMC expressed more confidence in the economy and issued a statement that “near-term risks to the economic outlook have diminished.” The FOMC also expressed caution as inflation remains stalled and is “expected to remain low in the near term.”
The Henry Fund research team expects the federal funds rate to remain unchanged at 0.50% percent over the next 6 months. We anticipate that a more robust jobs market and stronger inflation will lead the FOMC to increase the federal funds rate to 1.0% over the next two years. We anticipate that other key short term and long term rates will follow a similar trajectory to the fed funds rate. We forecast that 6-month T-Bill rates will remain relatively unchanged at 0.6% before rising to 0.95% over the next two years. We expect the 6-month 10-year T-Bond yield to remain relatively unchanged at 1.58% before rising to 2.3% over the next 2 years.
In the month of August, oil prices made their highest monthly gain since April 2016, increasing by about 20%. We forecast a slight increase in oil prices over the course of the next 6 months, increasing to $49 from the current price of $47. Although prices will rise, the increase will be modest as the long-term effects of the global oversupply will continue to be felt into the near future. We forecast oil prices will continue increasing to $57 by late 2018.
August of 2016 saw an 11-month high in consumer confidence due in part to job growth and low gasoline prices. The consumer confidence index rose to 101.1, up from a downwardly revised 96.7. This increased confidence could bode well for the housing market with 6.4% of Americans planning to purchase a house in the next 6 months. We forecast consumer confidence to remain stable over the next 6 months, with a slight growth over 2 years.
The US dollar fell following comments from Fed Chair Janet Yellen that a 2016 increase in interest rate would be highly likely. We forecast a very slight 6-month drop in USD per Euro, falling to $1.12 from 1.13. Strong job numbers and a surprise bump in consumer confidence have led the dollar to edge higher against the Japanese Yen. We forecast a slight the Yen will remain stable at 100 in the near term and increase to 105 by August 2018.
The S&P 500 has recovered from its brief 113 point drop following the Brexit vote in June, posting a positive YTD return of 6.5%. We anticipate that over the next 6 months the S&P will see a slight dip to 2170. Over the intermediate term we forecast continued positive, but low returns, growing to 2375 by 2018 for an 8.8% gain as the market waits for earnings to catch up to current valuation levels.