There was never any question that the headlines in 2020 would be dominated by the presidential campaign. No one ever expected 2020 to be a year of “the economy, stupid!” Chairman Mao’s dictum “Put politics in command!” seems more to the point.
Writing those lines the morning after Iran’s missile strike on U.S. bases in Iraq, I cannot put out of my mind the way possible political twists could affect the economy. For months, analysts have pondered whether the announcement of a U.S.-China trade deal would raise economic spirits in 2020. Now we have the prospects of military conflict in the Middle East, perhaps with rising oil prices and patriotic fervor on all sides, to think about.
Prognosticating about the impact of political events on the economy seems both doomed to failure and thankless. Having acknowledged that politics will dominate this year, allow me to turn to the somewhat more tractable field of the state of the economy and its short-term prospects.
In the second and third quarters of 2019, U.S. economic growth moved into a lower gear. Real GDP grew at just about 2 percent in both quarters, buoyed by steady growth in consumer spending. Increasingly, consumers have been isolated in pushing the economy forward; their only supporting partner has been government, but the push from the 2017 tax bill has largely run out of steam.
On the negative side, business investment in new equipment, factories and structures actually fell, while construction of homes and apartments grew feebly. Investment, the most volatile part of GDP, is the one that usually drives expansions and recessions. For example, the last recession was triggered by the collapse of home prices and the near-cessation of residential construction.
This 2 percent pace is reasonably healthy. With unemployment still very low and inflation a touch below the Federal Reserve’s 2 percent target, the economy is fairly healthy, as Federal Reserve Chairman Jerome Powell has repeatedly emphasized. Overall, wages are growing a bit faster, but not fast enough to create concerns about rising inflation.
The $64,000 question is whether all of this can last. The U.S. economy has officially been in an expansion for more than a decade, setting a post-World War II record for the longest expansion period. The word “roaring” will not come to anyone’s lips, but fans of slow and steady (go Tortoise!) will have a chance to make their point. The Fed’s two rate cuts in 2019 should provide support for interest-sensitive sectors of the economy, such as housing and consumer durables, as mortgages and car loans become a bit more attractive.
U.S. financial markets mainly seem to be thriving, especially the stock market. But there was a bit of a stir over “yield-curve inversion” in the fall, with one-year interest rates higher than the 10-year rates. In the past, this has been a leading indicator of a recession, reflecting expectations that economic activity would fall in the next year or two. But dramatic changes in the structure of the U.S. financial system, with banks losing much of their central role as deposit-takers to money market mutual funds and their central role as lenders to bond issuance and non-bank lenders, cast some doubt on the reliability of this signal.
There are some pockets of stress in the financial markets, most of all increased signs of companies having difficulties repaying “leveraged loans,” a category of risky loans. So far, however, nothing more concrete has emerged, although caution requires me to note that financial risks are not always detected in advance.
Looking beyond the U.S., world economic growth has been slowing. The usually reserved International Monetary Fund used dramatic language when it said that “the outlook remains precarious” in its last World Economic Outlook published on October 15, with both Europe and Japan in a weak state. China’s GDP growth also seems to have slowed, partly from the effects of the trade war and partly from long-standing growth challenges.
Usually, U.S. recessions are made in America, not abroad. The weakness beyond our shores probably would not be enough to plunge the U.S. into recession. But if U.S. consumers do become more cautious, or a significant problem emerges in the financial sector, a recession could very well be on the horizon.
Often, economists speculate about “soft-landings” and continued expansion. Recessions tend to be global events these days, and they usually hit the major economies at more or less the same time. By professional training and personal disposition, I am a bit of a pessimist. I always expect that the next recession will hit us, my only question is when. 2020 might not be the year of the next recession, but then again, it might.
But what are the chances that we will even notice the economy above the din of political news?
Evan Kraft is the economist in residence for the economics department at American University. He served as director of the Research Department and adviser to the governor of the Croatian National Bank.