This is part of a series on the global outlook for next year. The previous report on the global 2020 outlook may be found here.
The latest economic data and policy developments confirm that the US economy is not about to fall off a cliff. As we peek into the next decade, we believe a US soft landing is possible with gently easing employment trends, more cautious business investment, slowing consumer spending momentum and ongoing support from the Federal Reserve.
Our top 10 calls for 2020 are:
1. Sub-potential, but not recessionary economy – growth at 1.6%
While the US remains in what Fed Chair Jerome Powell calls a “good place,” momentum is undeniably slowing. We expect real GDP growth will cool from 2.3% in 2019 to 1.6% in 2020 – 0.2ppts below our estimate of potential growth as well as consensus. The US will remain the fastest growing G7 economy in 2020, but it will only grow 0.8ppt faster than the other economies, compared with 1.3ppt in 2019.
2. Cooler employment and wage growth constrain income and outlays
While businesses are turning more cautious about the outlook, they’re still hiring. We foresee average monthly job growth moderating from 175,000 in 2019 to around 100,000 in 2020, while the unemployment rate hovers around 3.6% and wage growth moderates to just under 3%. We foresee consumer spending growing 2.2% in 2020 as real disposable income rises 1.7%.
3. Housing sector activity moves sideways
The housing market has shown renewed signs of life in the last few months. Following an expected 2% contraction in residential investment in 2019, we forecast modest growth of only 0.9% in 2019, with housing starts rising to 1.29 million units.
4. Business investment stalls amid lingering industrial slump
We see the pace of business investment growth cooling from nearly 2.5% in 2019 to 0.8% in 2020 amid a lingering industrial slump. We expect industrial output will be flat in 2020 following a 0.8% advance in 2019. Further, we note the growing risk from rising low-quality corporate debt.
5. Inflation undershoots relative to the Fed’s 2% target
As anticipated, headline and core inflation significantly fell short of the Fed’s 2% target in 2019. In 2020 we see headline PCE inflation averaging 1.7%, while core inflation hovers just below 2%. Low energy prices, a still-strong dollar, moderate pricing power and an ongoing slip in inflation expectations amid moderate wage growth should prevent a significant breakout in inflation as economic activity cools.
6. Lingering protectionism and elevated trade policy uncertainty
The combination of slower global activity – with GDP cooling from 3.2% in 2018 to 2.5% in 2019 and 2020 – and lingering protectionism will translate into a net trade drag of 0.1ppt on GDP growth in 2020. We see US export and import volumes posting very modest advances, with the trade deficit steady around $650 billion, or 3% of GDP. We don’t foresee a significant dialling back of trade tensions vis-à-vis China, but nor do we see an escalation to blanket tariffs on all imports from China. Instead, we believe the US administration will maintain the threat of tariffs on the final tranche of China imports and on autos from Japan and Europe up until the presidential elections.
7. One more Fed rate cut in 2020 before a long pause
While the Federal Reserve implemented a third quarter-point rate cut in late October, Chairman Powell signaled a pause in the rate-setting FOMC’s easing cycle. Factoring in our sub-potential growth forecast and our expectation for a persistent inflation undershoot of the Fed’s 2% target, we believe it will deliver a further single rate cut in early 2020.
8. US economy favors a Donald Trump election win next November
Our Election Model predicts that President Trump will win the popular vote in the 2020 presidential election with a 5point majority. A record-low unemployment rate, subdued inflation and only moderately cooler income growth will favor the incumbent party despite some party fatigue. The model, which is solely based on economic factors, has correctly predicted the two-party popular vote in 16 of the last 18 elections since 1948 (with misses in 1968 and 1976). Importantly, in 2000 and 2016, the model correctly predicted the popular vote, but the Electoral College vote differed, leading to the opposite outcome. As we look to the 2020 elections, we stress that regional developments in swing states, non-economic issues (including policy and political developments) as well as factors like race, gender and “likeability” are poised to play an outsized role.
9. Stock prices and Treasury yields move sideways, with downside risks
We believe US equities are unlikely to make much headway in 2020, with risks skewed to the downside. Stock prices have set new highs in recent weeks following encouraging news on US-China trade talks, but valuations appear stretched, and the fundamental backdrop remains weak. Earnings are currently contracting, and consensus expectations for a sharp, V-shaped recovery in 2020 appear too optimistic in an environment of still-sluggish global growth and weak corporate pricing power. The level of corporate leverage is also a growing concern
10. Elevated recession odds at 35% as economy nears stall speed
Our modelling points to six-month-ahead recession odds at 36% – still below the critical 50% threshold breached prior to each of the past six recessions.