Published in Finance

U.S. Economic Outlook: Economists expect U.S. to avoid recession in 2020

BY Sunday, December 22, 2019 06:12pm

 

Fears of a national recession in 2020 are largely unfounded. 

Left: Jim Robey, W.E. Upjohn Institute for Employment Research, right: Gabe Ehrlich, University of Michigan Research Seminar in Quantitative Economics COURTESY PHOTOS

So insists Jim Robey, director of regional economic planning services at the Kalamazoo-based W.E. Upjohn Institute for Employment Research.

Amid outlooks that predict slower growth ahead for the U.S., Robey and other economists don’t see a recession occurring in 2020, nor the year after. Rather, they project the nation’s record economic expansion will keep going, as it has been for more than a decade.

“No one is thinking 2020 is a recession year, and maybe not even in 2021,” Robey said.

Helping to keep the U.S. economy growing, even if at a slower pace, is high consumer spending and confidence, according to Robey. Key measures of consumer confidence by the University of Michigan and The Conference Board remain high.

The University of Michigan consumer sentiment index stood at 99.2 as of December, up from 96.8 a month earlier and 98.3 a year earlier. The Conference Board’s index has slipped in recent months, although its last report in November noted that consumer “confidence levels are still high.”

“As long as they’re strong and they believe in the economy, we’re probably going to be OK,” Robey said of consumers, a segment that accounts for two-thirds of the U.S. economy.

Outlooks generally expect U.S. Real GDP growth of 2 percent or lower for 2020.

The Federal Reserve Board’s latest outlook projects 2 percent Real GDP growth next year, down from an expected 2.2 percent in 2019. In the longer term, the Federal Reserve forecasts Real GDP growth to ease to 1.9 percent in 2021 and 1.8 percent in 2022.

University of Michigan economists predict 1.7 percent Real GDP growth for both 2020 and 2021.

Gabe Ehrlich, associate director of the University of Michigan Research Seminar in Quantitative Economics, described the 2020 outlook as “reasonably good. It’s slow but steady progress and no recession.”

“This far into a business cycle expansion, that’s pretty good,” Ehrlich said. “The natural tendency of the economy is to grow over time. The reality is that the U.S. economy has a lot going for it.”

Increasing odds 

At Comerica Inc., economists in a December outlook predicted 1.9 percent Real GDP growth in 2020. Comerica credited consumers with keeping the U.S. economy growing.

“Despite weakness in both business investment and the manufacturing sector, the consumer sector has been a key source of strength and stability for the U.S. economy,” Comerica economists wrote in their monthly outlook. “Consumer spending increased at a faster rate than GDP for five out of the seven quarters ending in 2019 Q3. Consistent healthy consumer spending has been supported by a tight labor market.”

Yet that doesn’t mean the U.S. economy can avoid risks for a recession, such as a slowing manufacturing sector and weakening business investment that could ultimately carry over to consumer confidence and spending. Comerica pegs the probability of a recession at 22 percent within the next six months and 40 percent within a year. That probability grows to 53 percent within two years and 63 percent within three years, according to the Comerica outlook.

In a survey of 53 economic forecasters by the National Association of Business Economics, one in five said they expected the U.S. economy to begin turning downward by mid 2020 and one-third expects that a downturn won’t occur until the second half of 2021 or later.

NABE survey respondents expect 2020 Real GDP growth of 1.8 percent.

Tariff uncertainty

As the new year approaches, the U.S. economy continues to grapple with the effects of trade tariffs and the trade war with China.

That uncertainty takes a toll on business confidence and capital spending, the latter of which has been trending downward as of late, Ehrlich said. The trade war, he said, “obviously is not a big plus for growth.”

“One of the biggest things is the uncertainty involved. When you’re making a long-term investment, you really want to know what the rules are. Right now, companies just don’t know what the rules of the game are going to be, and that’s tricky,” Ehrlich said. “To some extent, that can matter even more than just the tariffs themselves. You don’t know. There’s the direct costs of tariffs, but then there’s the fact that they could be different a year from now.”

A new trade deal with Mexico and Canada could help ease some of the uncertainty, Robey said. 

Enacting the U.S.-Mexico-Canada Agreement, referred to as USMCA, “is absolutely essential,” Robey said. In Michigan, Canada accounts for nearly 42 percent of the state’s $58 billion in exports annually, while Mexico receives 21.2 percent, he said.

“I think USMCA will be very good for us, particularly taking uncertainty out of the market,” Robey said. 

Even with slower growth, economic outlooks predict that unemployment across the country will remain low, providing employers little relief from a tight labor market. Comerica predicts a 3.5 percent unemployment rate for 2020, and the University of Michigan projects 3.5 percent next year and 3.4 percent in 2021.

The Federal Reserve projects an unemployment rate of 3.5 percent in 2020 growing slightly to 3.6 percent in 2021.

Interest rate stability

Business owners can look forward to one important piece of certainty: Interest rates will not rise early in the new year.

After three interest rate cuts since July, the Federal Open Market Committee (FOMC) voted Dec. 11 to keep the federal funds rate at its present level. In a statement, the FOMC noted that unemployment remains low and that “although household spending has been rising at a strong pace, business fixed investment and exports remain weak.”

“Our economic outlook remains a favorable one despite global developments and ongoing risks,” Federal Reserve Chairman Jerome Powell stated. “We believe that the current stance of monetary policy will support sustained growth, a strong labor market, and inflation near our symmetric 2 percent objective. As long as incoming information about the economy remains broadly consistent with this outlook, the current stance of monetary policy likely will remain appropriate.”

Outlooks generally expected the FOMC to maintain the present federal funds rate.

Robey at the Upjohn Institute views holding interest rates steady as appropriate.

“I’m looking at the fundamentals of the economy and there’s no reason to lower interest rates,” Robey said. 

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