The following release was prepared by Ben Martin and Qian Wang 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.
On March 25, Q4 2015 real GDP growth was revised upward for the second time to 1.4%, surprising both analysts and investors. The boost was primarily driven by a 2.4% increase in personal consumption expenditures. The Henry Fund team currently anticipates growth to moderate a little in 2016 before accelerating in subsequent years. Our 6-month forecast currently stands at 2.1%, which we expect to increase to 2.6% over the next 2 years. Our GDP expectations were influenced by lower personal income and consumer spending in February of 0.2% and 0.1%, respectively.
Driven by a 6% decline in energy prices, headline CPI inflation declined 0.2% in February which brought the annual rate down to 1%. However, at the core, CPI increased 0.3% and came in at 2.3% on an annual basis. The Henry Fund team currently expects headline CPI to increase very slightly to 1.1% over the next 6 months. Our 2-year forecast is of about 1.8% is predicated on a moderate recovery in energy prices and increases wages.
Despite a higher than expected 215,000 increase in nonfarm payrolls, the official unemployment ticked up to 5% in March. However, the increase in the headline rate was the result of a higher participation rate, signaling strength in the labor market. The Henry Fund team anticipates this strength to continue over both a 6-month and 2-year horizon with the unemployment rate coming in at 4.8% in both periods.
On April 6, the FOMC voted against a second increase in the fed funds rate. In light of this, our view that the Fed will not meet their stated goal of four rate hikes this year is unchanged from last month. However, we still anticipate one more 25 bps hike over the next 6-months (0.75% target) and a gradual rise to 1.25% over the next 2 years. Consistent with this belief, we anticipate both the 1-year and 10-year to increase as well. We currently expect the 1-year T-bill rate to increase to 0.7% over the next 6-months and 1.3% over the next 2-years. The 10-year T-bond is expected to follow a similar pattern, rising to 2.0% over the next 6-months and 2.8% over the course of 2 years.
As the global economy is easing into a steady growth phase, top oil producers such as Russia and Saudi Arabia have reached an oil-freeze agreement and will discuss the details in Doha on April 17th. Crude oil prices have been bouncing back since the beginning of April, rising from $36 per barrel to $42, which is the highest price YTD. The team has positive thoughts on oil prices, as we do not see any material deterioration in the global economy, and the current over-production problem is diminishing slowly but steadily. We forecast oil prices will stabilize around $40 in the short-term and will increase to $51 by 2018.
With lower oil prices and unemployment, as well as generally higher disposal income, consumer confidence bounced back to 96.2 in April after it dropped to 92.2 in March. Overall, the team expects consumer confidence to be stable in both the short and long-term. Though currently there is economic weakness in certain emerging and developed markets, we are optimistic that the US economy will not be negatively affected any further.
In an effort to boost their respective economies, both the European and Japanese central banks have continued to loosen monetary policy, taking rates negative in some instances. The Japanese yen has appreciated against the US dollar since January, with the current exchange rate around 110. However, the Henry Fund team does not foresee any substantial economy growth within Japan or increasing demand for the Japanese yen. We believe the exchange rate should be around 115 and 120 in the short and long-term, respectively. The euro has depreciated around 20% to the dollar between the beginning of 2015 and now. Currently, the exchange rate is 1.14. The team expects it will drop to 1.10 in the short-term and 1.06 by 2018, as there is more economic growth in the US relative to Europe, which is also facing some major societal issues such as the immigration crisis.
Despite some volatility early on, the S&P 500 is currently up just under 1% YTD. The team anticipates it will continue to trend upwards over the next 6 months to 2070, returning 1.3%. Overall, we are very confident about the US economy in the long-run. Thus, we anticipate the S&P 500 will continue to increase to 2200 or 6.8% by 2018.