How Economic Forecasts Will Affect 2020

It seems that every week a new candidate or two is either getting into the Democratic presidential nomination contest, as Sen. Kamala Harris did on Sunday, or getting out, as Los Angeles Mayor Eric Garcetti did on Tuesday. Something that should be on the minds of Democrats and Republicans, strategists and operatives at every level is what the political environment will be during the 2020 campaign season, and a key determinant will be the state and direction of the U.S. economy. Where the economy is and where it seems to be headed will dramatically affect both the messaging by candidates and the policies they advocate.

Keeping in mind that roughly 70 percent of the U.S. economy is driven by consumer spending, how consumers are feeling matters a lot. That’s why we carefully watch various consumer-confidence ratings, polls that measure both public attitudes about the current state of the economy as well as public expectations about the economy for the immediate future. The survey results are derived from a battery of questions that include plans to buy major appliances, cars, and homes, availability of jobs in their local areas, and simply how they perceive economic conditions are and will be in the coming months or year.

The Conference Board released its Consumer Confidence Index on Tuesday, with interviews for the first half of January (through Jan. 17) declining in confidence, echoing drops in the index for interviews conducted in both November and December to its lowest level in over a year. An equally closely watched indicator, the University of Michigan’s national Index of Consumer Sentiment, dropped in October and November, increased slightly in December, and then dropped sharply in the first half of January to its lowest level since October 2016. Michigan will release new numbers Friday morning. Similarly, the National Federation of Independent Business’s Small Business Optimism Index has declined as well—an important indicator given that small businesses account for 49 percent of all private-sector employment and 64 percent of net new private-sector employment. A certain amount of oscillation occurs all the time, but when all three of these indices hook down simultaneously, it’s worth noting.

Besides consumer confidence and consumer spending, there is our ability to sell U.S.-made goods and services abroad. A global economy that is clearly slowing down is certainly a dark cloud on the horizon; the slower world economic growth, the less we can sell what we make here at home.

Economic forecasting is just as perilous as predicting politics. Economists can and do predict the level of economic growth by quarter and year along with unemployment and a myriad of other economic measurements, but they need to be seen as highly educated guesses. We will hear estimates on exactly how much the economy grew in 2018 in the coming weeks, but it will likely end up around 3 percent. Forecasts for GDP growth in 2019 are mostly over 2 percent but under 3 percent; the crystal ball for over a year out is obviously cloudier, but most estimates seem to be over 1 percent but less than 2 percent. While an outright recession is possible this year or next, and some are predicting one, it’s more likely that there won’t be one. But keep in mind that the current expansion is the second longest since the end of the Great Depression and if it continues through July will set a record. As is often said, expansions don’t die of old age but they can grow weaker.

So even if we don’t tip into a recession between now and the election, the smart money is on the economy slowing down a good bit, as it did in the third quarter after that terrific second quarter of 2018’s 4.2 percent GDP growth rate, and appears to have in the fourth quarter (the preliminary numbers were supposed to come out this past Wednesday but were delayed by the government shutdown). The Atlanta Federal Reserve Bank’s latest computer model forecasts a 2.7 percent growth rate, the same as the January survey of economists by Blue Chip Economic Indicators. The New York Fed’s model is a touch lower at 2.57 percent, with a forecast of 2.17 percent for this current, first quarter of 2019.

Renowned University of Iowa political scientist Michael Lewis-Beck and others in the field have noted a strong relationship between presidential-election outcomes and not only the current state of the economy but also the direction of the economy—voters are of one mind if they sense it is improving but another if they think it is in decline. So things aren’t quite binary—that if the economy is in a recession a president is screwed, and if it is not he or she is fine. The direction of the arrow is important as well.

One concerning factor is that the tool kit used to fight slowing economies might not be as effective as is typically the case. Usually when the economy is growing and strong, the federal government tends to reduce its deficit spending and lower the debt level in order to have a greater ability to increase spending to goose the economy when it starts to slow or, God forbid, go into a recession. But with our deficit and debt increasing rapidly, it makes priming the pump—using government spending to get out of an economic tailspin—more difficult. Similarly, with interest rates already low, the Federal Reserve Board has been trying to raise them without hurting the economy, but it doesn’t have much room to lower them further if the economy starts to turn south. In short, the normal tools used to prevent or get out of recessions are likely to be less available this time around.

This week the Federal Reserve Board’s Open Market Committee decided, as widely predicted, not to raise interest rates at this meeting, a sign that they do not feel comfortable enough about economic growth. But more surprisingly, Fed Chairman Jerome Powell suggested that we may have seen the last interest-rate hikes for this cycle, raising the question: What data or signals are the Fed governors and their economists seeing that has made them so worried about the state or direction of the economy? That’s something that is as worth watching as the polls.

This story was originally published on nationaljournal.com on February 1, 2019