The 2020 Economic Outlook

The U.S. economy is expected to expand 1.5-2.0% in 2020. Many of the uncertainties that weighed against business fixed investment in 2019 seem likely to continue into the first half of the year, but the downside risks to the growth outlook appear to be less worrisome than they did in the summer. Consumer spending is likely to grow at a moderate pace, supported by job gains and wage growth, but limited by slower growth in the labor force. Business fixed investment is likely to be mixed and somewhat restrained, but we ought to see some general improvement. Federal Reserve officials have signaled that monetary policy will remain on hold until there is a material change in the economic outlook.

Job growth, while uneven, slowed in 2019, partly reflecting a tighter job market. Firms continue to report difficulties in finding skilled workers. The unemployment rate fell to a 50-year low. Demographic changes (an aging population, slower growth in the working-age population, reduced immigration) imply that the workforce will grow at about 0.5% per year over the next 10 years, slower than in previous decades. Workers are also consumers, so the potential upside on consumer spending growth is likely to be limited (labor force growth of 0.5% plus productivity growth of 1.0-1.5% gets you a potential GDP growth rate of 1.5-2.0%). Despite a low unemployment rate, there is likely some slack remaining in the job market, but it’s unclear how much.

The Bureau of Labor Statistics has estimated that the March 2019 level of nonfarm payrolls will be lowered by about 500,000 in its annual benchmark revision (to be applied February 7). This revision, based on payroll tax receipts, implies that job growth was somewhat slower than reported in 2018.

Over half a million temporary workers will be hired for the 2020 census, boosting payrolls in the spring, but this will fall off in the summer. Given the tight labor market, the Census Bureau may have difficulties in finding enough workers, but many of these positions will be part-time.

Tight labor markets have led to some upward pressure on wages. Over the years, reduced union membership and a greater concentration of large firms have shifted wage bargaining power from workers to businesses. Skilled labor shortages have boosted wage gains for key employees, but firms have also used non-wage incentives to attract and retain workers, including signing bonuses and offering more vacation and other perks. Cost containment remains a key theme for corporate America.

Business fixed investment weakened in 2019. Some of the factors that restrained capital spending in 2019, including a contraction in energy exploration, problems at Boeing, and the General Motors strike, will be behind us in 2020. However, trade policy uncertainty and slow global growth, the two negative factors most often cited across manufacturing industries, may continue. In contrast to consumer confidence, which has remained elevated, business sentiment weakened in 2019.

While a full trade agreement rolling back tariffs appears unlikely, there is hope for a truce in trade tensions between the U.S. and China (that is, an agreement not to escalate). However, there is a danger of a further separation of the world’s two largest economies, and protectionist sentiments have risen around the world. The trade dispute has led to a shift in production away from China to Vietnam, Thailand, Mexico, and other countries.