The U.S. economy is now in its 78th month of economic expansion. After two months of soft job growth at the end of summer, the nation bounced back in October, producing 298,000 net new jobs according to the latest estimate, followed by 211,000 net new jobs in November. As of this writing, the Federal Reserve has yet to increase its benchmark short-term rates, but this eventuality is now presumed.

It took the U.S. a long time to arrive at this mid-cycle stage of the recovery. No one could have possibly predicted that the economy would be in recovery for the better part of seven years before the Federal Reserve raised rates. There are some who argue that, even now, such tightening is not justified. Average hourly earnings have increased 2.3% during the past year.

While that’s not terrible, it is well below the 3.5% threshold that the Federal Reserve often associates with healthy wage growth. Other reasons often supplied in support of restraining monetary tightening is the general lack of inflation, an already too strong U.S. dollar and the deflationary effects of crumbling commodity prices.

Costs to Rise

That said, with the official national unemployment rate down to 5%, wage growth is likely to accelerate in 2016. In fact, a number of costs will rise more aggressively in 2016, including health care costs. These cost increases, working in conjunction with rising interest rates, will squeeze profit margins at many firms.

If oil, natural gas and commodity prices begin to recover in earnest next year, margins at many area firms will be impacted even further. The U.S. economy has continued to progress, albeit erratically, despite a sea of headwinds; at the heart of the recovery are economic segments that benefit disproportionately from ultra-low interest rates.

Among the leading sources of growth in the U.S. economy are auto purchases, auto production, residential construction and nonresidential construction. Each of these segments have been fueled by low interest rates and a growing appetite among many households for debt, including in the form of auto loans, student loans and mortgages.

The U.S. auto industry is on track for a record year in sales in 2015. Based on WardsAuto figures, U.S. auto sales are on pace to end 2015 topping the year 2000 record of 17.4 million vehicles sold. In October, auto sales totaled 18.2 million on a seasonally adjusted annualized basis, which represents the highest level since October 2001, when automakers began offering zero percent financing in the aftermath of the Sept. 11 attacks of that year.

Auto sales this year are up by nearly 14% on a year-over-year basis and by roughly 16% at GM. Rising outlays among many state and local governments have produced additional impetus.

Maryland’s Humming

Despite ongoing wage gains, job creation and reasonable levels of consumer confidence, the U.S. economy failed to expand at a 3% or better pace in 2015 for a 10th consecutive year. This has much to do with parts of the economy that are no longer expanding, in large measure because of movements in exchange rates and commodity prices.

The strengthening U.S. dollar has undone export growth momentum. The U.S. trade deficit expanded 3.4% in October 2015 as exports of American-produced services and goods fell to their lowest level in three years, while America’s trade deficit with Mexico rose to its highest level in three years.

But international trade flows hardly represent the only source of braking power being imposed on the U.S. economy. Falling oil and natural gas prices have diminished investment in the nation’s energy industries, while low agricultural prices continue to impact various farming communities. Energy-rich states such as Alaska, North Dakota and Oklahoma are at risk of falling into a recession, while West Virginia has already entered such an economic downturn.

After a few years of being among the nation’s slower growing economies, Maryland’s economy has begun to hum again. The state has added jobs at roughly the same pace as the nation during the past year. Despite rugged optics in 2015 due to social unrest and a calamitous Baltimore Ravens season, the Baltimore region has added the bulk of Maryland’s net new jobs recently, and has been adding jobs at a rate faster than the nation in recent months.

Much of this good news is attributable to the economic strength of the southern portion of the metropolitan area — namely Howard and Anne Arundel counties.

Around the State

Construction volumes continue to recover in Maryland, with large-scale projects apparent in Calvert, Prince George’s, Howard, Baltimore and other counties, as well as in Baltimore City. Unlike certain other parts of the country, Maryland’s communities do not suffer when commodity prices fall. This is nearly of pure benefit to the local economy given that we primarily consume energy. Because of its smallish export sector, Maryland is also relatively less impacted by a stronger U.S. dollar.

Moreover, a wealthy state like Maryland benefits disproportionately from high financial asset prices, since a higher fraction of families possesses financial wealth. Stabilizing housing markets are also helping to propel Maryland ahead.

Among the most significant challenges for the local economy are large amounts of available, vacant office space. Not only did sequestration impact many contractors and impact collective demand for space, but the average firm appears focused on using considerably less space per worker.

The result is a massive quantity of unfilled office space in Montgomery County and even more in Northern Virginia. Office space absorption should be positive next year in the Corridor as professional service firms expand their respective payrolls on average, but the overhang in the region’s office space market will require many good years to absorb. Creative approaches supplied by both the private and public sectors would help.

Anirban Basu is chairman and CEO of Baltimore-based Sage Policy Group. He can be contacted at 410-522-7243 and [email protected].