Slowing GDP growth but no recession

Forecasting the complex U.S. economy is not a simple or easy task, yet Sam Kahan of ACT Research had the most accurate economic forecasts among the nation's top economists for the years 2015 through 2018. He joins 35 economists who have been honored annually since 1982 with the Lawrence R. Klein Award, one of the best-known and longest-standing achievements in the field.

“No person is an island,” Kahan said at the 2019 Lawrence R. Klein Award reception on Oct. 16 at University Club in New York. “I would like to acknowledge the input fellow ACT Research members provided in this endeavor. Their views, insights, and, of course, criticisms helped clarify and crystallize my thoughts and were a valuable contribution to my achieving this award.”

The Blue Chip Economic Indicators newsletter is the source of the forecasts used to select the winner. Kahan outshined some 50 competitors for this year’s award, which is judged and sponsored by the W. P. Carey School of Business. Established in 1976, Wolters Kluwer's Blue Chip Economic Indicators is synonymous with the latest in expert opinion on the future performance of the U.S. economy. Each month, the newsletter compiles the forecasts of 50 leading business economists for key indicators of economic growth.

Kahan delivered his 2020 economic forecast at the ceremony, including these predictions.

Decelerating but still positive real GDP growth for the U.S. economy

“As we approach 2020, the concerns about the viability of the U.S. economy are on top of the economic agenda. It’s not comforting that the uncertainty and risks are occurring in the framework of a decelerating economy. The October Blue Chip results give a sense of the situation. The Blue-Chip panel is projecting 2020 real GDP to decelerate to a 1.8% pace from 2019’s 2.3%. Concerning 2020, only one forecaster expects 2020 to be better than the 2019 average — and by merely a tick. Two forecasters are projecting a positive number that is less than 1%. The rest of the forecasters predict 2020 to be in the 1.2% to 2.0% range. In short, all are looking for a weaker real GDP; we just don’t know how weak. Undeniably, the U.S. economy is vulnerable. Much of this vulnerability is attributable to the trade and tariff-related tensions.

“Just as one swallow doesn’t make a summer, one indicator of economic decline doesn’t signal a recession. The U.S. economy is a broad and complex entity often compared to a large ocean-going vessel whose change in course requires much effort and time. So too a change in the U.S. economy would require either a significant shock and/or an accumulation of sizable weakness. So far, these signals are still largely absent. Consequently, and despite the increased level of uncertainty, we maintain that an economy-wide recession can still be avoided. There are risks and, as mentioned previously, the U.S. economy is in a decelerating mode. Nonetheless, our best guess remains slow growth in 2020 and avoidance of recession.

The weakness of the goods-producing segments of the economy

“We have for quite some time pinpointed manufacturing, retail, and housing as key vulnerable sectors given their sensitivity to tariffs and trade. Freight and transportation are closely linked to these sectors and therefore should also exhibit decelerating activity. We called this weakness ‘rolling recessions,’ a term coined by Ed Yardeni of Yardeni Research. Events since mid-2018 continue to unfold in line with this diagnosis, even as the broad economy remains positive.

“ACT Research forecasts real GDP to average 2.3% in 2019 and to decelerate to 1.7% in 2020, pretty close to the Blue-Chip consensus. The unemployment rate, currently at 3.5% will rise to a 3.8% average in 2020 but remain well below the estimated natural rate of 4.5%. Headline inflation measures are likely to be slightly below the Federal Reserve’s target of 2% while the core rates travel slightly above the 2% target.

“The United Auto Workers is currently on strike, and depending on the length of the labor dispute, real GDP in the fourth quarter 2019 could be reduced by -0.1% to -0.4%. But once settled, real GDP should rebound by an equal or greater amount in 2020. [If UAW strike is still in effect on October 16, add a comment.]

Sector overview

“The consumer sector provides a solid base for growth. In addition to the usual determinants of labor and income, we would add sentiment measures as an indicator of the future path. Expectations are correlated with consumer spending over the long-run but are especially sensitive at inflection points. There’s a negative relationship between tariff practices and sentiment moves that require close watch.

“Expectations, as measured by the University of Michigan and Conference Board surveys, began an upward march with the election of President Trump. Their values at that time were: UoM – 76 and Conference Board – 86. These are our consumer sector signposts. A decline below these figures would mark a shift to a more pessimistic mode.

“Consumer expectations of both surveys slumped sharply in the wake of President Trump’s August announcements extending tariffs for Chinese imports. Sentiment fell but remained above the signposts and, as matters unfolded, continued to stabilize.

“Business investment consists of three components: structures, equipment, and intellectual property (aka research and development). Spending on structures will be negative in 2020 primarily due to cutbacks in energy expenditures. Equipment spending, consistent with a slowing economy, decelerates but stays positive at 1%. Intellectual property spending remains robust and grows at a 6% pace. Combining the subsectors implies 2020 non-residential expenditure growth of approximately 2.5%, slightly better than half the average growth rate of the prior three years.

“The housing sector should remain a minor actor in the economic growth drama. Lifted by the sharp decline of interest rates and a sizable deceleration in-home price increases, we look for residential investment to provide a positive but modest upturn in 2020. This sector had experienced negative growth in 2018 and 2019.

“Swings in inventories have been a critical variable in the long history of business cycles. Changes in management procedures, application of just-in-time delivery, and better information flows have reduced the volatility of inventories. Baring a shock, the impact of inventory swings should be modest. The uncertainty of tariff imposition and the staggered enactment of fees is likely to boost inventory accumulation in the second half of 2019 with a payback, drawdown, likely in the first half of 2020.

“Trade continues being a drag on economic growth. We can hope for an improvement in the trade environment but continued tensions with China, weak European growth and, of course, Brexit outcomes are also possible. We expect the trade deficit to exceed $1 trillion in 2020 in part as the strength of the dollar, with a lag, restricts export growth and boosts imports."

Transportation and freight drive weak goods-producing segments

The freight and transportation segment of the U.S. economy is ACT Research’s expertise. The ups and downs of this sector are closely connected to industrial activity, manufacturing, construction, energy, retail, housing, and farming. “Our vantage point provides a partial view of the broad U.S. economy with a bias to the goods-producing side. This segment’s value is near $1.6 trillion or a shade less than 10% of real GDP,” Kahan explained.

“The deceleration we are forecasting for the overall economy is likely to be mirrored by freight and transportation,” said Kahan. “The volatility should be more pronounced than the general GDP because this segment is biased toward goods. A decline of roughly 30% for truck production in 2020 is what we expect. This would be a sizable deceleration but somewhat milder than a 50% drop that would be a typical recessionary response.”

Kahan expects U.S. economic growth in 2020 to advance at a subdued rate. He said strength in consumer spending coupled with modest but still upbeat increases in business investment keep growth positive. “Inflation is forecast to be relatively tame,” he said, “and headline numbers will be slightly below the Fed’s preferred rate of 2% while the core measures are slightly above 2%. For all practical purposes, the fiscal policy continues moribund, and monetary policy remains the only game in town.”

According to Kahan’s forecast, a long list of uncertainties should keep forecasters on their toes as they attempt to peek around economic corners. “And let’s not forget or underestimate the wrenches that the upcoming presidential campaigning may provide,” said Kahan. The good news: The U.S.’s strong institutions will survive.”

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