Morningstar analysts are cautious in their outlook for how the U.S. economy will perform next year.

In fact, their predictions are pessimistic compared with the views of other economists – including those with the Federal Reserve, and they also zig when others zag when it comes to inflation.

“We are forecasting 2.0%-2.5% GDP growth for 2016, lower than most other economists predict, mostly driven by the consumer with little help from other areas of the economy,” said Robert Johnson, CFA, director of economic analysis, and Roland Czerniawski, a member of the group’s markets research team. “As we lap some of the biggest energy price declines, we suspect headline inflation could easily approach 2.5% by the end of 2016.”

The Details

The Morningstar analysts say their 2016 outlook “isn’t much different than our forecasts for the prior three years.”

While consumers are boosting the economy, or at least pushing it along, they are not getting much help from other key GDP drivers, according to an outlook report released Monday.

Morningstar expects government spending to be limited “by extreme pressures not to raise taxes” and higher spending on transfer payments vs. spending on goods and services that can more directly benefit growth.

There are other trends working against more robust economic growth, too, they point out.

“Shifts away from brick-and-mortar stores and the rethinking of office space, as well ongoing issues in oil drilling, mean business investment spending won’t provide much help, either,” Johnson and Czerniawski said.

Net exports are likely to be in negative territory thanks to slow world growth, weak commodity prices and a strong dollar; plus, consumers are poised to buy cheaper imported goods.

“Residential spending should continue to add a few tenths of a percent to GDP growth, but our belief is housing growth will not accelerate from current levels,” the analysts explained.

“Over the past few years, most forecasters have believed that growth would accelerate in the year ahead, with the economy reaching some type of escape velocity and eventually a 3.0%-3.5% growth rate, if not more,” the Morningstar duo stated. “However, both slowing population growth rates and an aging population make it extremely unlikely that the U.S. or any developed market can ever reach those types of growth rates on anything but a very short-term basis.”

The team sees employment growth at 1.9% in 2016, below its 2.25% GDP forecast as productivity continues to expand. This percentage represents some 220,000 new jobs per month, or 2.6 million per year, especially in the service sector.

As for inflation, the core rate has been under 1.7% for the past three years, excluding food and energy, though it expanded in 2015 to 2.0% due to rising rents and increased health-care expenses.

“Those same dynamics, plus increased shortages of workers, could push core inflation even higher in 2016, to the 2.2%-2.4% range,” said Johnson and Czerniawski. “Falling oil prices have largely masked the steady increases in services inflation in 2015.”

In addition, a geopolitical event or OPEC clampdown on oil production might push overall inflation closer to 3%, they add.

With a shortage of new homes, prices of existing homes rose nearly 6% in 2015.

“We think analysts are overestimating starts and underestimating home-price appreciation again for 2016. Ramping up housing production is not easy. And where housing demand is high, there are few available lots to build on. That problem is particularly visible in California and New York City,” the duo explained.

Debt Virtues

Without debt to “amplify incomes,” the overall economic growth rate is “considerably lower than it would be if debt were growing at a sensible level,” they state.

Of course, debt levels that get out of hand “are damaging,” but shrinking debt levels aren’t “all they are cracked up to be … because that means the economy will generally grow more slowly than incomes if debt is falling,” according to the analysts.

In the early-2000s, debt growth was an explosive 9%. Today, however, debt growth stands at 3.4% year over year.

While the Morningstar analysts point out that they “are cognizant that too much credit and debt is not a good thing … nonetheless, it looks as if slow credit growth is continuing to hold the economy back.”

The annual 3.4% rate of credit growth seems to be lower than the combined total of real GDP growth of 2.5% and inflation of 2% for a total of 4.5%, “which seems to be a fair approximation of how fast debt should grow if it were at optimal levels,” they explain.

Some areas with easy access to credit are returning to normal, like the auto industry. Meanwhile, tight credit has been keeping growth in the housing sector at about half its all-time high.

“A modest easing of credit terms could prove to be a big help for the economy, if not taken to extremes,” Johnson and Czerniawski said.

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