January 2020 U.S. Economic Outlook

Robert A. Dye, Ph.D.


Daniel Sanabria

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The path of the U.S. economy through 2020 will be shaped by monetary policy, hiring and business investment.

2020: The Year Ahead

    The path of the U.S. economy through 2020 will be shaped by monetary policy, hiring and business investment. Through the first half of 2020, Federal Reserve monetary policy will be very predictable. At the end of 2019, Fed Chairman Jay Powell and other Fed officials reinforced the idea that the Fed is in “pause” mode. The pause came after a series of three 25 basis point interest rate cuts through the middle of 2019. The last time the Fed followed a similar pattern was in the 1990s, when the pause lasted for about two and a half years, allowing for one small adjustment. Now we see in the most recent dot plot from December, that most Fed officials expect to keep the fed funds rate unchanged through 2020. Jay Powell has set a moderately high bar for any future policy changes. According to Powell, the Fed will maintain the current level of the fed funds rate until their outlook “materially” changes. The Fed’s dot plot for 2021 shows that the majority of Fed officials believe that their next move will be to increase the fed funds rate once in 2021.
    We can generalize the forces on the Fed to say that they face two different challenges over the next few years. On the one hand, they face the challenge of cooler U.S. economic performance (likely accompanied by some financial market volatility). On the other hand, they face the challenge of controlling inflation, which is still below the 2 percent target. The Fed’s dot plot for 2021, consistent with one fed funds rate hike, implies that the Fed believes that economic performance will be reasonably good, and that inflation pressures will increase.
    However, looking at the fed funds futures market, the majority of interest rate speculators assume the opposite. The futures market shows that most speculators believe that the Fed will decrease the fed funds rate by at least 25 basis points by the end of 2020. This implies that most speculators believe downside economic risk is the dominant factor.
    We agree with that assessment of risks. We are maintaining our forecast of one 25 basis point cut to the fed funds rate this year, coming at the June 9/10 Federal Open Market Committee meeting. We believe that downside risk factors from both within the U.S. and internationally, will keep the U.S economy subdued this year. The FOMC meetings in June and July will give the Fed the opportunity to make an adjustment to the fed funds rate before the heart of the election campaign season later this fall. Barring a strong event, the Fed will likely leave policy unchanged at their September 15/16 meeting. The FOMC meeting over November 4/5 comes immediately after election day on Tuesday November 3. Any Fed action on November 5 will be interpreted through a political lens, which they would like to avoid.
    We also expect hiring to cool gradually through 2020. This is fundamentally important to the U.S. economy because, through 2019, the consumer sector was the strength of the economy. Job creation is the foundation of consumer sector strength. The Bureau of Labor Statistics has already warned that employment data historical revisions, which they will publish on February 7, will show a net downward adjustment of about a half a million workers through 2018 and into early 2019. The adjustment is expected to show that job creation stepped down through 2018 and into 2019. We expect that trend to continue through 2020. To monitor the potential for cooler hiring, we will be following three key indicators, unemployment insurance claims, the hiring rate and layoff announcements.
    Business investment was weak in 2019. Trade policy disruption, recession risk, the GM/UAW strike, reduced oil drilling and weaker international conditions were negative factors last year. Over the year ending in 2019Q3, real business fixed investment increased by only 1.4 percent. The good news is that trade policy risk appears to be reduced in 2020. Partially because of that, recession risk is also reduced in 2020. GM’s labor issues are resolved, but Boeing’s issues are getting worse. The decline in the drilling rig count through 2019 appears to be levelling out. Europe is still weak, but China looks firmer in early 2020. We look for real BFI to improve modestly this year, expanding by 3.0 percent for the year ending in 2020Q4. This is still a somewhat subdued growth rate, consistent with ongoing downside risk factors.


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January 13, 2020
Robert A. Dye, Ph.D., Senior Vice President and Chief Economist at Comerica Bank

Robert A. Dye, Ph.D.

Senior Vice President and Chief Economist
Daniel Sanabria, Senior Economist at Comerica Bank

Daniel Sanabria

Senior Economist