Looking Back, Looking Forward
As expected, U.S. economic growth moderated in 2019. Fiscal stimulus (tax cuts and increased government spending) had added to growth in 2018, but the impact has faded over time. By the summer of 2019, increased trade tensions appeared to dampen growth.
Manufacturing activity weakened and business investment declined. An inverted yield curve signaled increased odds that the U.S. economy might enter a recession in 2020. In response, the Federal Reserve cut short-term interest rates three times, helping to reduce recession fears, and expectations of a possible trade deal were viewed positively.
Consumer spending was uneven in recent quarters, but the underlying trend remained moderately strong, supported by job gains and wage growth. The pace of job growth slowed in 2019, partly reflecting labor market constraints, but remained beyond a pace needed to absorb new entrants into the workforce. Business fixed investment weakened, partly reflecting a decrease in energy exploration and problems at Boeing. However, trade policy and slower global growth were also factors. Tariffs raise costs for consumers and businesses, disrupt supply chains, invite retaliation against U.S. exports, and add to uncertainty, dampening business investment. U.S. manufacturers use parts and supplies from around the world, and generally have difficulty passing higher costs along.
The White House has recognized the economic impact of tariffs. Since 2020 is an election year, boosting growth will be a priority. Hence, we should see further efforts to ease trade tensions. Federal Reserve (Fed) officials have been divided on the appropriate course of monetary policy. Some feared that rate cuts could add to inflation pressures or inflate financial bubbles. However, evidence showed weakness in business investment and growing downside risks. Moreover, the connection between tight labor markets and higher inflation appeared to be broken (if it ever existed). Following the October 30 rate cut, Fed Chair Jerome Powell indicated that monetary policy was “in a good place,” suggesting that the central bank was done cutting rates for the foreseeable future. While the Fed would respond to signs of more pronounced economic weakness, the 2019 rate cuts should help to ensure against the downside risks. Economic outlook Consumer spending growth is expected to moderate in 2020, reflecting slower growth in the workforce.
Business investment is likely to rebound to some extent. Homebuilding picked up in the third quarter of 2019, following declines over the six previous quarters, and there is some room for improvement, but the contribution to overall growth is expected to be small.
Political uncertainty is expected to be an important issue for investors in 2020. Healthcare, regulations, taxes and other campaign issues could dampen sentiment. While the odds of a recession have declined, downturns are typically psychological, and expectations of a recession could become self-fulfilling. Factors undermining business investment could lead to job cuts or reduced hiring, which would reduce consumer spending, leading to further job cuts, and so on. Barring a sharp rise in productivity growth, the pace of economic growth ought to be limited, but continued expansion remains the most likely scenario.