2020 Economic Outlook

Scott Anderson
Posted by Scott Anderson
Chief Economist

Christmas has come early to the U.S. stock market. The market is rapidly closing in on a 30% gain year-to-date, and investor optimism is at a fever pitch. But as 2019 comes to a close and with 2020 on the horizon, we thought this week would be a good time to take account of where we are in the U.S and global expansion. What will shape U.S. economic performance in the coming year?

Let’s start with where we’ve come from. In 2019, the U.S. expansion became the longest in post-war history, continually growing for 11 years. It’s been a long time in the making, but this economic expansion, like the Energizer bunny, has been breaking through economic milestone after milestone and keeps ongoing.

Unemployment rate stays very low 

This is an era of tight labor markets. The U.S. unemployment rate is at its lowest levels since 1969. There are 7.3 million open positions in the U.S. as of October – one open position for every 0.78 unemployed persons. Twenty-two and a half million net new jobs have been created in the U.S. since the expansion started. We expect the average unemployment rate to remain nearly unchanged next year, remaining at historically low levels. This is good news for continued consumer spending, but could dent corporate profitability in 2020 as rising labor costs outpace consumer inflation.

Healthier balance sheets

Household balance sheets are pristine in the aggregate. Household net worth is at record highs (up 89% since 2009) as U.S. equity prices and home prices reach new heights. Consumers have also reduced their mortgage debt, as a share of disposable personal income, to 2000 levels. Because of historically low interest rates, household debt-service burdens are the lowest on record going back to 1980, according to Federal Reserve data.

Loosening up, again

Central banks that represent more than 70% of global GDP have eased monetary policy in 2019, including three quarter-point interest rate cuts from the Fed. The Fed also shifted from balance sheet reduction to expansion this year. This has kept financial conditions loose and banks’ lending to consumers and businesses despite elevated uncertainty. This is pushing U.S. and global equity prices to record high levels and reaccelerating homebuilding and housing price gains.

Anemic global growth

This backdrop probably sounds like an economic hall of fame. However, the global economy is struggling with a synchronized slowdown that has been underway for two consecutive years. In fact, a global GDP tracker we follow constructed from trade flows and other more-timely economic indicators, suggest global GDP growth is currently trending at a very anemic 2.0% from a year ago.  Anything weaker than 2.0% global GDP growth is widely considered by economists to qualify as a global recession. The global economic slowdown in 2019 was exacerbated and extended by rising trade and geopolitical tensions that have disrupted global trade, taken a toll on business confidence and investment, and shaken global manufacturing activity worldwide. Global trade likely grew at a tepid 1.25% this year.

Green shoots?

So what’s in store for 2020? Some green shoots in the global economy have emerged in recent months. Global manufacturing PMIs appear to be stabilizing at low levels, while global service businesses continue to expand, but at a somewhat slower pace than a year ago. Economic surprises have turned positive in China and for many Eurozone economies. OECD leading economic indicators are pointing to reacceleration ahead for countries like China, Brazil, Germany, and France. On the other hand, countries such as India, Japan, Italy, and the United Kingdom appear poised to lose momentum.

In the U.S. it appears growth and the expansion are on a sustainable path in 2020. The risk of a U.S. recession next year has diminished as two major geopolitical risks, U.S. – China trade war escalation and U.K. policy uncertainty on Brexit, are taken off the table.

For more insights, check out the full report here.

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