US 2020 Macro Outlook
Our macro outlook for the US in 2020 is set against the risk that ongoing weak business investment spreads to the job market and ultimately to the consumer at a time when the US business cycle is showing its age. We forecast 1.3% annual GDP growth next year versus 2.2% in 2019. In other words, we think the deceleration in US activity will continue next year.
The crucial question is what happens to the US consumer. The ongoing resilience of the US job market would seem to support the view that private consumption will remain strong in 2020, offsetting the softness in business investment. But we expect the job market to start to weaken, likely hurting consumer spending.
Further weighing on growth prospects is the sheer length of this growth phase of the economic cycle. There are increasing signs that the US economy is now ‘late cycle’, including the fact that GDP is now around 1% above its theoretical potential (as calculated by the Congressional Budget Office). In other words, the economy is now running at full steam, at least in theory.
While extremely loose financial conditions mean we do not forecast a US recession, an unexpected tightening in those conditions could have brutal consequences. Through three 25bps rate cuts since July 2019, the Fed has moved actively to ease policy. But we do not think these cuts are enough to change the current dynamics in the US economy and trigger a V-shaped rebound in activity similar to 1999.
While some trade tariffs could be removed, a ‘phase 1’ trade deal with China is likely to be symbolic rather a final, comprehensive trade agreement. We think US business leaders will remain sceptical about any truce—rightly so, in our view, as we see underlying tension in the US-China relationship persisting due to structural challenges (China’s long-term economic rise, geopolitical considerations etc.).
Meanwhile, we remain anxious about the ongoing slowdown in the US shale oil sector, which could fuel further weakness in business investment. Against this backdrop, the Fed will have to resume policy accommodation after a period of holding rates steady. We see the next Fed rate cut coming in late Q2 2020 and anticipate a total of 100bps of easing next year.
As Washington DC is already on the campaign trail for the November elections (and the Democrat-held House is trying to impeach the president), it is unlikely that fiscal policy will play a big role in stimulating the economy in 2020. The 2020 electoral campaign could also provide clues about the ongoing spread of Modern Monetary Theory (MMT), or ‘ultra loose-fiscal/ultra loose-monetary’ ideas. We see ‘MMT-ization’ progressing further among right- or left-wing thinkers alike.