U.S. outlook for 2020
Associate Professor Emeritus, Department of Economics, Indiana University Bloomington
A year ago, we expected that 2019 would represent a step up from the 2.5 percent growth achieved in 2018 with growth approaching 3 percent. But we also warned that the risks were mostly to the downside. This was not a great forecast, but also not too bad.
We expect now that 2019 will end up with output growth a little below that of 2018 (see Figure 1). In our outlook a year ago, we recognized that domestic political dysfunction and international trade friction posed threats to our forecast, and unfortunately this has proven to be the case. The resulting disruption of supply chains and deterioration in business confidence has produced a significant slowing in the growth of investment. Other deviations from our forecast essentially balance out: Consumption has been close to our expectation; housing was a little below forecast but was offset by stronger government spending; improvement in the trade deficit was offset by less inventory accumulation.
Figure 1: Rate of change in U.S. real output
Source: U.S. Bureau of Economic Analysis
The labor market is headed for a pretty good year, but not as good as we expected. A year ago, we predicted that the economy would create jobs at a rate close to 200,000 per month and that the unemployment rate would fall a little. The latter has been the case, but job creation has averaged just 167,000 (through October), as seen in Figure 2. As we expected, the labor force participation rate (the proportion of the working-age population that is active in the labor market) has risen slightly.
Figure 2: U.S. monthly job creation and unemployment rate, January 2016 to October 2019
Source: U.S. Bureau of Labor Statistics
Overall, the performance of the economy during 2019, while positive, has been below both 2018 and our expectations. This raises concerns for the year ahead.
Looking to that future, we are forecasting another year of weakening growth for the economy—and we do so with some quivers of dread. A few specifics:
- We expect output growth in 2020 to average a little below 2 percent. However, by this time next year, quarterly growth could be struggling to remain above the 2 percent level.
- Employment will continue the trends seen in 2019—growth will remain positive, but the rate of growth will fall. Job creation will average well below 150,000 for all of 2020, and could be at or below 100,000 by the end of the year.
- The labor market will remain tight. The unemployment rate could decline a little, but it is already at a five-decade low. Demographic pressures could produce some erosion in the labor force participation rate. Firms unable to find workers will remain an important theme.
- Consumer spending will continue to advance, but at a rate below this year. Business investment will remain weak—although a little improved from this year. Housing will achieve a modest increase, ending two years of negative growth. Government spending will grow, but much more slowly than the past year as the impact of the 2018 budget deal ends.
- The Fed should hold short-term interest rates stable, but could be bullied by pressure from politicians and from Wall Street to lower rates.
To summarize, our 2020 expectation for the U.S. economy is that the expansion will remain intact into a record 12th year. However, we expect that growth will be weaker than in the past two years, and this outlook is likely a best-case outcome. Furthermore, there are significant downside risks in the current environment, which could cause an outcome worse than we expect. A short list:
- The Trump administration imposes a large dose of uncertainty to the outlook, which is compounded in an election year and by the impeachment inquiry. This uncertainty raises downside risk.
- The trade war situation has worsened over the past year, producing a negative impact in areas such as business investment. The USMCA replacement for NAFTA was reached a year ago, but there is little sign that it will be ratified any time soon.
- The international state of affairs raises a multiplicity of other issues. Growth in the rest of the world has clearly moved lower. The Chinese economy faces serious structural problems, which probably make a trade deal with them more difficult. The European Union also has structural issues that hamper any real growth. Brexit seems to be moving ahead, but it is likely to be a short-term negative for both the U.K. and the EU.
- We have long felt that Federal Reserve policy has produced significant distortions in the financial sector that at some point would have to be corrected. The reversal in that process over the past few months is, in our view, counterproductive.
Beyond this standard list of concerns, there are a lot of small things that we find unsettling. For example, the total number of job openings in the economy peaked in late 2018. And average hours worked have been flat over the past year. And auto sales have been flat for nearly two years. Given the reliance of the U.S. economy on consumer spending, these are disturbing signs. But they are vague signs—and not enough to convince us that the end of the expansion is in sight.
So to summarize: This year has been a little below our year-ago expectations. Our outlook is for further deceleration in growth during 2020, but still growth. There is, however, massive uncertainty in the current situation. A year from now, I hope we will report that the economy matched our less-than-optimistic expectations in 2020. But the risks that we might be wrong are mostly to the downside.