December 15, 2019
Slow Growth, but Not a Recession in 2020
I released my 2020 economist forecast last week, projecting the U.S. economy to slow significantly next year. The model I use projects that annualized growth rates will slip from 1.9 percent in the first quarter of 2020 down to 1.7 percent by the year’s end. Here in Indiana, my forecasting model has growth slowing to 1.6 percent in the first quarter and to 1.4 percent by the year’s end.
This is agonizingly slow economic growth. Like most of the Midwest, Indiana’s economy slowed through 2019 and is almost certain to end the year with fewer jobs than we had last January. This is not a nationwide recession, though it seems likely Indiana will continue to shed jobs through at least the summer of 2020.
My forecast is wrong, of course (as all forecasts inevitably are). However, in reviewing the direction of error, I find most of my mistakes are in the optimistic range. I certainly hope that changes, but right now little evidence suggests otherwise.
In thinking about our current economy, it is important to discuss the current policy environment. The Federal Reserve is busily engaged in a form of quantitative easing to the tune of close to $400 billion. Interest rates are near historical lows and our federal deficit topped $1.1 trillion last year. More pointedly, the farm bailout is now much larger than the auto bailout in the summer of 2009.
Taken altogether, it is a simple fact that our federal government is currently engaged in deeper economic stimulus than we saw in the first year of the Obama Presidency. That was in the midst of the darkest days of the Great Recession. Whatever good we can note about our recent economic performance has to be calibrated against those facts.
There is a moral lesson here for many Hoosiers. If you were outraged by the Obama’s Administration's stimulus and bailouts and are sympathetic to the worries of the Tea Party in 2009, you face a clear choice. Today, you must be either much more livid or have abandoned any appearance of personal integrity on these matters.
It is worse than run-of-the-mill intellectual dishonesty to compare unfavorably the Democrats and President Obama’s bailouts of 2009 with the Republicans and President Trump today. The 2009 stimulus and bailouts occurred in the midst of the deepest economic crisis since the 1930s. Today’s vast stimulus and bailout occurs at the tail end of the longest economic expansion in 175 years. The current fiscal environment is unsupportable.
In short, the 2019 and 2020 economies are sizing up to be the worst non-recession years in post-World War II history. They are going to be worse for manufacturing-intensive states. Right now, Indiana, Wisconsin, Michigan, Ohio and Illinois have fewer factory jobs than we started the year with. Some of this is doubtless due to a return to trend of declining manufacturing employment, but the trade war is most responsible for this downturn. But, there is also good news.
Wage growth, which has been very sluggish through the recovery, has been strong and growing for well over a year. The unemployment rate is well beneath the level most economists thought would cause rapid inflation, yet there is no evidence of inflationary pressures. Jobs across the nation are abundant; perhaps not great jobs, but jobs nonetheless. The strength of demand for workers spills over into other measures of labor market health.
The broadest measures of unemployment, which includes the underemployed and those who work sporadically, is down year-over-year. The size of the labor force is growing; up 1.6 million potential workers since 2018. Moreover, the employment-to-population ratio has nearly recovered to the peak of the early 2000s without accounting for baby boomer retirements.
These strong labor markets mean that consumers are still buying. Consumer spending doesn’t cause economic growth, but it stabilizes an economy by giving confidence to businesses and investors. Even with a clear economic slowdown, people are buying homes, filling them with furniture, buying consumer electronics and otherwise translating the fruits of their labor into consumption.
For 2020, the job losses in manufacturing simply won’t be enough to push our economy into a recession. But, in a world where fiscal and monetary stimuli are more akin to the Great Depression than a long recovery, and all the global ills surround an unpredictable and highly idiosyncratic trade war, forecasting certainty is hard to come by.
About the Author
Educational Attainment, the 21st Century Fund and the Future of SchoolingIndiana ranks 42nd in educational attainment.
Big Savings for Ending Prevailing WageMy statistical models show that repealing state prevailing wage laws save taxpayers money.
Re-Thinking Economic Development A large share of the most mobile families—perhaps half—no longer need to live near where they work.
Money Illusion and InflationPrice fluctuation could cause inflation to last longer, but it didn’t cause the inflation, it simply extends the pain.View archives