The U.S. economy is expected to expand moderately in 2020. Many of the 2019 uncertainties 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 (Fed) policy is expected to remain on hold until we get a material change in the economic outlook.
Job growth, while uneven, slowed in 2019, 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 ten years, slower than in previous decades. Workers are also consumers, so the potential upside on consumer spending growth is likely to be limited.
A simple yield curve model of recession suggests about a 25% chance of a downturn within the next 12 months, down from 40% in August, but still a little too high for comfort. The main risk is that the factors that have restrained capital spending will worsen, leading to reduced hiring and increased layoffs, but there are currently few signs of a deterioration in labor market conditions.
- Many of the 2019 uncertainties seem likely to continue into the first half of the year, but the downside risks to the growth outlook appear to be less worrisome.
- Trade policy uncertainty and slower global growth, the two negative factors most widely cited across manufacturing industries, may continue to some extent. In contrast to consumer confidence, which has remained elevated, business sentiment weakened in 2019.
- Fed policy is expected to remain on hold until we get a material change in economic conditions.
All expressions of opinion reflect the judgment of Raymond James & Associates, Inc., and are subject to change. Past performance may not be indicative of future results.