MSU Economic Forecast Model
Michigan 2020 Economic Outlook
Throughout 2019, the specter of a recession hung low in the air as past predictors of impending recessions, like the yield-curve inversion and slowing housing markets, raised conjectures that a recession was near. But many of the old rules in economic forecasting have not held sway, and the relationship between term rate of interest and economic growth has failed to hold in the current environment. Rather, and potentially the most important indicator, gross domestic product, remains poised for future growth.
There is a lot of discussion of a manufacturing sector recession. While the use of the term recession is usually reserved for times of aggregate economic declines, its use in describing the manufacturing sectors is meant to highlight reductions in manufacturing output. While the rule of thumb is that a recession occurs if there are two consecutive quarters of output declines, the national data does not support the conjecture that manufacturing output is in decline. Nationally, manufacturing output took a reversal in the first quarter but leveled off in the second quarter. The third quarter numbers are not out yet, though the consensus is that it will show a decline. So, to say that manufacturing output is weak is valid, but calling this a manufacturing recession may be overly ardent.
In light of the current Administration’s tough stance on trade relations, there is also a lot of talk about trade. It is hard to keep track, but the U.S. has imposed 10 to 25 percent tariffs on about $524 billion of imported goods from a slew of countries and commodities (U.S. imports about $3,149 billion annually). When the U.S. imposes tariffs, the countries they target usually retaliate with their own tariffs on U.S. goods – leading to what we call a trade war. It appears the tariffs have not led to their intended effects of reducing imports and advancing domestic production. Rather, since the first quarter of 2017, imports have increased almost four percent over exports, exacerbating the long-term trade imbalance.
Consumers remain the driving force of this economy. Consumer expenditures make up about two-thirds of the overall economy and consumers remain poised to spend. Consumer debt remains stable and confidence remains high, giving consumers greater reign on spending. First indications of the holiday spending show that consumers are vigorously spending. Through October of this year, consumer expenditures for durable goods like cars and appliances remain robust.
Threats to the national economy abound from both in the U.S. and from outside. China’s explosive economic growth continues its slow eb, though it remains robust compared to the U.S. The International Monetary Fund has reduced global outlook projections twice this year and projects the European Union to grow at its slowest rate since 2013. Of the EU countries, Germany’s economy, steeped in manufacturing, has lagged the rest of the EU. However, recent projections are for a modest boost, tempered by slowing global growth. Maybe the most potent threat is the treat of heightened trade wars. Trump’s on-again/off-again claims of international trade deals has imposed uncertainty to planned investment in plant and equipment, which has taken a hit over the last year. Investment in plant and equipment and research and development is vital to long-term growth. So, if this uncertainty has not adversely impacted the current economic outlook, it will likely be reflected in long-term projections into the foreseeable future.
We peg 2020 projections of U.S. Gross domestic product at 3.3 percent growth and on-par with 2019 projections. After accounting for expected inflation of 2.5 percent, we expect real growth of 0.8 percent in 2020. Expect the Federal Reserve interventions to be tempered in this election year, unless responding to unforeseen threats to the economy. We generally see 2020 conditions will not invoke Federal Reserve interventions to either loosen or tighten monetary policy, at least within the first half of 2020. Inflation remains tame, economic growth – stable and employment is full. We will likely see some upward pressure on wages due to tight labor markets, but wage gains have been reclusive over the last few years of full employment.
Speaking of employment, 2019 is expected to close with a gain of 2.2 million jobs, while we project 2020 to take on 1.44 million new jobs. That is, 2020 will show positive, yet slowing job growth nationally. While U.S. manufacturing output is showing weakness but growth, manufacturing sectors are expected to shed jobs in 2020 – giving credence to the notion of a manufacturing recession in the coming year. Anticipate retail trade employment to be flat in light of productivity gains that allows more to be done with less workers. Service sector jobs are expected to continue to grow at a stable rate, just south of their long-term trends.
The accompanying tables provides our detailed Mid-Year Forecast Update to the 2019 MSU Economic Forecast Model.
Updated December 6, 2019