Anil Puri Looks to 2020 During Conference
In terms of political discord, history is not a guide for the economy. For example, when President Richard Nixon resigned from office, the economy took a hit. On the flip side, when President Bill Clinton was impeached, the economy took off. With questions looming about a recession, Cal State Fullerton economist Anil Puri presented his economic forecast for 2020 during the business conference, “Deal or No Deal? The Art of Business in an Aging Expansion.”
Google searches for “Are we headed for a recession” reached their highest point in August 2019, the highest since 2008. It seems reasonable to ask the question. With more than 10 years of growth, this is the longest economic expansion in American history and the best since 1945. It would seem something has to give soon.
Business sentiment has downshifted due mostly to trade wars, geopolitical risks, lower-than-originally-estimated job growth and political uncertainty. While businesses and fiscal sentiment are on the wane, overall consumer sentiment is still very high. “Just because the U.S. economic expansion is 10 years old does not mean it has to end,” Anil Puri notes.
While speaking to business leaders in October, the Cal State Fullerton economist said the U.S. economy will slow down appreciably over the next 12 to 18 months, but he believes it will manage to escape recession with the expansion remaining intact.
The causes of the last three recessions were:
- Skyrocketing corporate debt composed of leveraged loans.
- High valuations on the stock market.
- Loosely-regulated “shadow banking” sector now accounting for 75 percent of leveraged loans.
Business expansions typically come to an end due to:
- Fiscal tightening
- Oil shocks
- Overheating with subsequent overtightening by the Federal Reserve
- Financial exuberance
Currently, none of these are imminent threats. Consumers are propelling growth at this stage. Consumer balance sheets are in pristine shape. Delinquencies are at historic lows and savings are up, which bodes well for the continued strength of the economy. Additionally, mortgage rates are at historic lows, while sales and construction are up.
‘Recession Watch’ dashboard
While Professor Puri and his colleagues are optimistic, they keep an eye on developments. They created a “recession watch dashboard” to track the performance of several leading indicators, using data from the last seven recessions. By comparing current data to the critical threshold for each indicator, it shows the risk of possible recession.
Of some concern are manufacturing, which is in the “recession territory” and the yield curve because long yields have been suppressed by the many rounds of quantitative easing. Leading factors that can mark changes in the business cycle are supply, demand, capital availability, and the overall outlook of the market on the economic future. The prediction is that overall in the U.S., growth will be slow at 2% in 2020 and 1.9% in 2021. This is mainly due to the ongoing trade war, a key component of President Trump’s economic policy.
The labor market should hold steady and the unemployment rate is expected to average 3.7% in 2019 as well as 2020 and probably increase slightly to 3.8% in 2021. That is substantially lower than the Federal Reserve’s target of 6.7%.
Construction is expected to grow at a rate of 1.8 million jobs. The next sectors seeing substantial increases will be in professional and other technical occupations, such as computer system design along with scientific and technical consulting.
In 2019, volatility hit the market around the world during the third quarter due to uncertainty in the areas of global growth and trade. Monetary policy, Brexit, and domestic political tensions all have had a huge effect on business sentiment and uncertainty. Moving forward, the future of the economy also depends largely on policy, and more worryingly, on the political process and political whims.