Robert Dye views 2019 as a “transitional year” for the U.S. economy as a trio of forces align to moderate growth during the year.
While the Comerica Inc. chief economist isn’t yet predicting a recession for next year and “most U.S. economic data right now is looking pretty good,” the combination of higher interest rates, rising wages from a tight labor market, and lower economic growth globally will make the economy more vulnerable a year from now, Dye said.
“I would characterize it as the probabilities of a recession by 2020 are going up. I’m expecting by the end of the year slower growth and I’m expecting this to feel like a more vulnerable economy going into 2020,” he said. “We have to think probabilistically about how headwinds are lining up and it looks like the probabilities of hitting headwinds are increasing and we can identify some areas that might be happening.”
As a result, Dye’s latest economic forecast lowered the outlook for Real GDP growth for the U.S. economy to 2.5 percent for all of 2019. He previously predicted 2.9 percent Real GDP growth for next year.
As the lengthy economic expansion that’s now the second-longest in U.S. history extends toward record territory by mid 2019, the U.S. economy will begin to slow, according to Dye.
“2019’s going to be a transitional year for the U.S. economy. We start the year with good momentum, and looking at the end of 2018, the bulk of U.S. economic indicators are in very good shape,” Dye said. “The transition we see through the year is cooler growth by the end of the year.”
Comerica’s updated economic outlook issued this month projects slower Real GDP growth throughout 2019, starting with 2.6 percent in the first quarter, 2.3 percent and 2.5 percent in the second and third quarters, respectively, and 2.4 percent for the fourth quarter. Real GDP growth would then dip to 2.1 percent in the first three months of 2020, according to Comerica’s latest outlook.
Economic data — a low unemployment rate, rising interest rates, and “interest-rate sensitive parts of the economy that are starting to show their sensitivity,” such as housing — point to an economy in the late stages of growth, according to Dye.
Still, the fundamentals of the U.S. economy “are very, very good,” Jim Robey, director of regional economic planning services at the Kalamazoo-based W.E. Upjohn Institute for Employment Research, said during a presentation in Grand Rapids this month as part of The Right Place Inc.’s annual outlook.
Robey noted that consumer confidence remains at an all-time high, although it continues “to bounce around a little bit.”
“As long as people are buying things and doing things, it’s good, and that certainly sends a signal to the economy that things are going well,” he said.
Robey does not see a recession within the next 24 to 36 months, although he joins many other economists in expecting slower growth.
Indicators such as auto sales and housing prices are “really just moving back to trend,” he said.
“The question I’m starting to ask is will we talk ourselves into a recession?” Robey said. “Will a recession become a self-fulfilling prophecy?”
The Federal Reserve Bank of Chicago, based on the consensus of three-dozen attendees at an economic symposium in late November, projects 2.4 percent Real GDP growth next year.
Jeff Korzenik, chief investment strategist at Fifth Third Bank, expects Real GDP growth of 2.5 percent to 2.75 percent for 2019.
Capital investments by businesses following the 2017 federal tax cut will lead to higher productivity, contributing to continued economic growth, Korzenik said. Business confidence and corporate earnings remain high as well, “and you just don’t get a recession when earnings are growing,” he said.
“There’s evidence that we still have time to go in this expansion,” Korzenik said.
If capital investments continue to stay strong, any future economic downturn is not likely to occur until 2021, he said.
In a 2019 U.S. outlook issued in mid-November, economists at the University of Michigan forecast 2.7 percent Real GDP growth in 2019, followed by 1.9 percent in 2020. That’s after expected 2018 Real GDP growth of 2.9 percent, “which is pretty good by recent standards,” said Gabriel Ehrlich, director of U-M’s Research Seminar in Quantitative Economics.
U-M also sees slower growth ahead for the U.S. economy, although no recession just yet.
“This expansion is getting long in the tooth. A few sectors are slowing down naturally,” Ehrlich said. “We see growth being pretty decent next year also. We expect it to keep on growing. 2019 should be a pretty good year; 2020 we see it slowing down — not stopping to grow, but just the growth is slowing.”
Other factors leading to slower economic growth are the lessening effects from the federal tax cuts enacted at the end of 2017 and higher government spending. Both provided stimulus to the economy this year, Ehrlich said.
“The bump we got in the tax cuts is basically going to be baked into the cake in 2019 and 2020,” he said.
Government spending “will keep pushing growth next year,” but start to abate in the second half, Ehrlich said. He notes that among key economic indicators of a future recession, such as cooling housing starts and sales, “some of them are flashing yellow. None of them are flashing red quite yet.”
Although they are projected to ease in 2019, auto sales should remain in “pretty good shape,” Ehrlich said. U-M projects North American light vehicle sales of 16.9 million units in 2019 and in 2020, both lower than the expected 17.1 million units this year.
Comerica projects 2019 light vehicle sales of 16.8 million units, as does the Federal Reserve Bank of Chicago.
The effects of trade tariffs remain one unknown for the U.S. economy. While the U.S. has signed a new trade agreement with Mexico and Canada that awaits ratification, executives continue to have lingering worries about a trade war with China.
Ehrlich at the U-M said he’s “worried” about a potential trade war with China “but not panicked.”
“There’s still an off ramp to the trade war with China,” he said.