Slow, Steady Growth for U.S. Economy
Published: Friday, January 31, 2020
The following is from William A. Strauss and Kelley Sarussi with the Federal Reserve Bank of Chicago.
The Federal Reserve Bank of Chicago held its 33rd annual Economic Outlook Symposium on Dec. 13. More than 140 economists and analysts from business, academia and government attended the conference. This Chicago Fed Letter reviews participants' forecasts for 2019 from the previous symposium and then analyzes their forecasts for 2020.
In the third quarter of 2019, the U.S. economy entered the 11th year of its expansion, making this the longest expansion in U.S. history. While the nation's real gross domestic product (GDP) is at its highest level ever, the rate of economic growth since the end of the Great Recession in mid-2009 has been quite restrained. During the 41 quarters following the second quarter of 2009, the annualized rate of real GDP growth was 2.3 percent—somewhat above what is considered the long-term rate of growth for the U.S. economy.
The economy expanded by 2.5 percent in 2018—a bit higher than the current expansion's average. However, the economy was challenged by a significant drop in the stock market as the year came to a close. The Standard & Poor's 500 stock market index fell dramatically between Sept. 21 and Dec. 24, 2018, losing 19.8 percent of its value. This led to concerns by some about a potential recession in 2019. Yet, back in 1966, Nobel Prize-winning economist Paul Samuelson wrote that "Wall Street indexes predicted nine out of the last five recessions," indicating that declines in the stock market are not necessarily reliable signals for imminent economic downturns.
The negative signals of late 2018 also turned out to be incorrect, and the market began rising again in late December. By the end of April 2019, the S&P 500 had recovered the entire drop in its value.
The annualized rate of real GDP growth was 3.1 percent in the first quarter of 2019, and then, in part challenged by increased tariffs and threats of additional tariffs, it decelerated to 2 percent in the second quarter and 2.1 percent in the third quarter. The moderation in economic growth in 2019 was largely due to slowing business investment (likely resulting from heightened uncertainty surrounding trade policy).
Real business fixed investment, which had expanded at a strong 5.9 percent pace in 2018, grew at a very weak annualized rate of .3 percent over the first three quarters of 2019. After registering a growth rate of -4.4 percent in 2018, real residential investment grew at an annualized rate of just .2 percent during the first three quarters of 2019. Moreover, the annualized rate of housing starts was 1.27 million units for the first 11 months of 2019—up .6 percent compared with the same period in 2018.
In contrast, consumer spending expanded at a solid pace in 2019: Real personal consumption expenditures grew at an annualized rate of 2.9 percent during the first three quarters of 2019—above the 2.6 percent rate recorded in 2018. The pace of light vehicle sales (car and light truck sales) was 16.9 million units in 2019—1.6 percent lower than the selling rate in 2018.
After averaging $67.19 during the first 10 months of 2018, West Texas Intermediate oil prices moved down sharply in the final two months of that year. The average price of oil fell from $70.60 per barrel in October 2018 to $49.14 per barrel in December 2018. In 2019, oil prices did move above $50 per barrel, averaging $56.99 per barrel for the year.
With relatively lower oil prices, more consumers continued to purchase larger, less fuel-efficient vehicles than in the year before: Sales of light trucks (including sport utility vehicles) were up 2.7 percent in 2019 compared with the previous year, while sales of passenger cars were down 10.8 percent. This shift in consumer demand (which continued a trend from the past couple of years) led to a record-setting share for light trucks of 72.4 percent of overall light vehicle sales in 2019.
Industrial production had an annualized growth rate of -.9 percent over the first 11 months of 2019—in stark contrast with its growth rate of 4 percent in 2018. The deterioration in industrial production was largely due to weakening business investment.
On an annualized basis, growth in real government spending was 3.1 percent over the first three quarters of 2019—well above its average annual rate of 1.2 percent over the past 20 years.
Against this backdrop, the U.S. economy continued to increase employment in 2019: 2.11 million jobs were added last year. Moreover, in the final quarter of 2019, the unemployment rate stood at 3.5 percent—below most economists' estimates of the natural rate of unemployment (i.e., the rate that would prevail in an economy making full use of its productive resources).
Inflation, as measured by the Consumer Price Index (CPI), decreased from a 2.2 percent reading in 2018 to a year-over-year rate of 2 percent in November 2019.
The consensus forecast for 2020 is for the pace of economic growth to be close to the long-term average. In 2020, the growth rate of real GDP is forecasted to be 1.7 percent—lower than the projected 2.2 percent rate for 2019. The quarterly outlook reveals a fairly steady expected performance throughout 2020 (close to the annual pace) for real GDP growth. The unemployment rate is predicted to remain relatively steady, at or near a very low 3.7 percent for each quarter, through the end of 2020.
Inflation, as measured by the CPI, is predicted to tick up from an estimated 1.9 percent in 2019 to 2 percent in 2020, according to the EOS consensus forecast. Oil prices are projected to edge higher throughout 2020. Real personal consumption expenditures are forecasted to expand at a pace of 2 percent in 2020—somewhat slower than in 2019. Light vehicle sales are expected to fall to 16.6 million units this year. The pace of real business fixed investment growth—which has averaged 3 percent over the past 20 years—is anticipated to improve to a still modest 1.8 percent in 2020. Industrial production is forecasted to grow by .9 percent this year—below its long-run average rate of growth.
The housing sector is predicted to improve modestly and continue its extremely slow march toward normalization in 2020. The growth rate of real residential investment is forecasted to move up to 1 percent in 2020 from .7 percent in 2019. And housing starts are anticipated to edge up to 1.28 million units in 2020—nearly in line with the 20-year annual average of roughly 1.27 million starts.
The one-year Treasury rate is expected to edge up to 1.69 percent in 2020, and the 10-year Treasury rate is forecasted to increase to 1.95 percent. The trade-weighted U.S. dollar is predicted to rise 2.7 percent in 2020, and the nation's trade deficit (i.e., net exports of goods and services) is anticipated to increase to a little over $1 trillion by the final quarter of 2020.
Diane Swonk, chief economist, Grant Thornton LLP, presented a generally positive outlook for U.S. consumers in 2020. According to her projection, growth in real consumer spending is expected to be slightly above 2 percent this year. She indicated that this forecast is supported by a strong labor market.
Overall, employment levels were high last year, even with the average monthly jobs gain 20 percent lower in 2019 than in 2018. Swonk attributed some of this slowdown to increased uncertainty surrounding trade policy. In addition, she noted that employment growth had been held back in part by a shortage of workers in some sectors, such as trucking, and by reduced demand for labor in others, such as retail.
As they did in 2019, the monthly jobs gains are predicted to slow somewhat but remain solid in 2020, according to Swonk. Relatedly, real wage growth is anticipated to be flat in 2020, she said.
Workers in entry-level positions have seen their wage growth picking up in recent years, she observed, yet those in managerial jobs have experienced slowing wage growth. Moreover, last summer there were upticks in unemployment and underemployment among new college graduates. More of the same is predicted for 2020, indicated Swonk.
In addition to the overall healthy labor market, the low interest rate environment is helping to keep consumer spending growing, Swonk suggested. Historically low mortgage rates are expected to lead to more home sales in 2020. And low mortgage rates should continue to encourage current homeowners to refinance their mortgages, freeing up funds to be spent on other goods.
Swonk did discuss a few downside risks to her outlook for U.S. consumers in 2020. Credit market conditions tightened in 2019, as evidenced by the drop in credit card application approvals last summer. Swonk also pointed out that credit card and auto loan defaults increased last year. If more such tightening and defaults are seen in 2020, consumer spending could be more muted than anticipated.
Heavy Machinery
Jim Meil, principal, industry analysis, Americas Commercial Transportation Research Co. LLC, shared his outlook for the heavy machinery industry in 2020. According to Meil, U.S. heavy machinery shipments are projected to be flat to slightly lower this year, given the headwinds facing the nation's manufacturing industry, as well as its agricultural, construction and energy sectors.
Manufacturing output in the U.S. expanded by nearly 3 percent in 2018, said Meil. But manufacturing production shrank in 2019; through October 2019, its year-to-date growth rate was -1.5 percent, he noted. Moreover, in August 2019, the Institute for Supply Management's Manufacturing PMI (Purchasing Managers' Index) fell below 50 percent (which is suggestive of a contraction in the manufacturing sector) and stayed there the rest of the year.
Given that manufacturing activity declined in 2019, Meil said he projects U.S. industrial machinery shipments to be flat in 2020, after rising by 3 percent last year.
Next, Meil turned his attention to the farm, construction and energy sectors, all of which rely on heavy machinery for their output. He said that corn, soybean and wheat prices had all fallen in recent years, in large part because of the trade war between the U.S. and China and a surplus of crops. Until crop exports rise again, farm machinery demand is anticipated to continue slipping.
Building activity was fairly flat in 2019, and it is expected to be steady yet again in 2020, Meil indicated. So, little is driving up construction equipment demand.
Meil also noted that volatile movements of crude oil prices over the past few years had stalled the recovery in U.S. mining and energy equipment sales from their 2016 nadir; he contended that until there is some assurance that oil prices will stay above $50 per barrel longer term, demand for such equipment is likely to continue to slide.
Meil said he predicts declines ranging from 5 percent to 8 percent for shipments of U.S. farm, construction, and mining and oil field equipment in 2020.
With regard to heavy machinery exports, Meil commented that a stronger U.S. dollar, weaker growth in industrial output in the European Union and India, and higher trade barriers are all hurting heavy machinery sales to foreign customers.
Conclusion
In 2019, the U.S. economy expanded at a pace just above the long-term average. The economy is forecasted to grow at a slower pace in 2020 than in 2019, though still near its long-run trend, according to EOS participants. Business investment and the housing sector are projected to improve in 2020. The unemployment rate is expected to stay low, at around 3.7 percent, through the end of 2020, and inflation is predicted to move up slightly to 2 percent.
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