With unemployment hitting record lows and the economy seemingly humming along in 2019, everyone should be hopeful 2020 will bring more of the same.
Right?
Not so fast, according to some economic experts. While there seems to be no real fear of a deep falloff in the economy, some experts seem to think the country is in for at least a slow start to the new year.
When looking at 2020 (and beyond), experts at ITR Economics in Manchester, N.H., are saying you need to study two sides of the same coin to get an accurate picture of what may be coming.
For instance, when talking “big picture” and consumer spending (eating out, buying retail, going to the movies), they believe there will be a slowdown, though positive growth is still on the way. But when it comes to the industrial side and investment spending, cloudy times could be coming.
Alex Chausovsky, director of Speaking Services for ITR Economics, said growth rates aren’t expected to go negative, but they’ll approach zero-growth before beginning to rise again in the second half of next year.
“Although the economy is still growing, that growth has been slowing,” said Chausovsky. “Growth rates are still positive, but they’re coming down … We expect that to continue until mid-2020.”
Perception is everything
Paul Traub, senior business economist with the Federal Reserve Bank of Chicago’s Detroit Branch, said there’s “a lot of positive sentiment” out there, driven by “perceptions of the economy,” including things like job growth, income growth, and more.
Traub said there “are signs” President Trump’s 2017 tax cut is “starting to wear off,” at least at the income level.
“The big difference, though, is the difference between expectations of businesses and those of consumers,” Traub said. “If you compare … consumer expectations from CEO expectations, it’s near record level lows. Consumers are a lot more optimistic than business leaders.”
Jim Robey, director of regional economic planning services at the W.E. Upjohn Institute, had a mix of things to say to a gathering in Grand Rapids, Mich., last month. W.E. Upjohn Institute, headquartered in Kalamazoo, is a not-for-profit, nonpartisan, independent research organization which studies policy-related issues of employment and unemployment.
Robey, speaking at the 23rd annual Economic Outlook for West Michigan, said while many pundits are forecasting a recession, the “fundamentals of the economy are solid.
“Nearly all forecasters are looking at positive, albeit slower, growth in gross domestic product over the next two years,” he told the gathering, hosted by The Right Place, Inc., a regional economic development organization.
Among his points:
• Many measures, including output and light vehicle sales are returning to trend.
• With consistent labor force participation rates and unemployment rates that are arguably below full employment (nationally, statewide and regionally), employment growth is forecast to be relatively flat.
• For Grand Rapids, growth in Gross Regional Product is forecast to be +1.8% overall, +1.1% for goods-producing industries, +2.2% for service-producing, and +.6% for government.
Michigan a good place for business
At the same gathering, The Right Place Inc. President and CEO Birgit Klohs highlighted several notable accomplishments from 2019, as all eyes turn toward 2020.
The results come from The Right Place’s 2017-2019 Strategic Plan (the group’s plan for 2020 is set for release Feb. 5) and highlighted projects and development that have taken place, including:
• In 2019, the organization completed 20 economic development projects, resulting in 1,591 new and retained jobs, $144.9 million in new and retained payroll and $239.6 million in new capital investment.
• Tracking against The Right Place’s 2017-2019 three-year strategic plan, the organization has spurred the creation of 5,192 new and retained jobs, on a goal of 4,200; $309.5 million in new and retained payroll, on a goal of $150 million; and $799.9 million in capital investment, on a goal of $500 million.
Maybe such success shouldn’t be surprising. According to the U.S. Small Business Administration, Michigan is a pretty good state in which to be a business, particularly a small business.
According to the SBA, the Great Lakes state has once again ranked among the top states for doing business, this time coming in 12th in the Tax Foundation’s 2020 State Business Tax Climate Index.
Constance Logan, Michigan District Director of the U.S. Small Business Administration, said Michigan is one of only two states in the Midwest to be in the top half of the rankings. Combined with a cost of living that is 10% below the national average, Michigan “has repeatedly earned its reputation as a business-friendly state.”
SBA’s own Office of Advocacy reports that Michigan small businesses employed 1.8 million people, or 49.2% of the private workforce, in 2015. Firms with fewer than 100 employees have the largest share of small business employment. And private-sector employment increased 0.8% during the 12-month period ending in January 2018.
Slower growth predicted
According to Logan, small businesses will “continue to play a vital role in building a healthy economy in Michigan.” According to economists, though, Michigan is experiencing slower growth that is predicted to last into 2020.
“We know that small businesses contribute the majority of net new jobs,” Logan said. “As we head into the next decade, SBA will continue to focus on programs and services that support both startup ventures and existing businesses that are growing and creating job opportunities.
“Businesses are facing uncertainty in how long this economic expansion will continue and SBA’s programs will be even more relevant to ensure that small businesses have access to capital, take advantage of a global marketplace, and get their foothold in the federal contracting arena,” Logan added.
Meanwhile, ITR’s Chausovsky said, indicators such as the U.S. Industrial Production Index, JP Morgan, the Wilshire Market cap, the U.S. Purchasing Managers Index and even the stock market all support ITR’s conclusion that the industrial economy could be in for a rough start to the new year.
Chausovsky said that, after a solid 2018, the industrial economy will have seen two relatively flat years (2019 and 2020). The bulk of the negativity, he said, will be concentrated in the first half of 2020.
“There’s an expectation of a split in the economy; investment territory is going to feel a little more pressure, with a mild recession in first half of next year, and it will level out toward end of year,” he said. “The stock market, the Wilshire Market Cap, is also confirming that pressure on the industrial economy in the first half of 2020.”
In Michigan, experts are saying that, while trade tensions and a shifting rate environment pressured U.S. business sentiment in the third quarter, key economic signs remain positive and companies continue to post revenue growth.
What the numbers show
Michigan’s business climate was better in the third quarter of 2019 than in the second, according to the latest business index from Citizens Bank. This is the second time the index has been released publicly, and Rick Hampson, president of Citizens Bank Michigan, said the index bodes well for 2020 because Michigan companies have been expanding since the first quarter of 2017.
“Michigan’s economy continues its upward move and I think that’s very positive for the state,’’ said Hampson. “We have a good mix of companies with a long track record of success and new businesses that are working to change the trajectory of our economy. This bodes well for 2020.’’
The Michigan business index for 2019’s third quarter was 52.4, up from the previous quarter’s index of 51.6. An index above 50 indicates an expansionary business trend. The index is created using public and proprietary information gathered from private and public companies. That data includes revenue, manufacturing volumes and wages.
In the latest report released by Citizens Commercial Banking, the Citizens Business Conditions index dropped from 61.2 to 60.2, but remained well above 50, showing continued confidence.
“The U.S. economy continues to show its resiliency, powered by consumers who continue to ignore the increasing geopolitical noise as they head into the traditional holiday shopping season,” said Tony Bedikian, head of Global Markets for Citizens Commercial Banking, in December. “The slight dip in the Index seems to have been caused by continued trade uncertainty, but even that was not enough to make much of a dent in the indicators overall. While there seems to be growing concern about next year, it also seems as if economists have been saying that every year for at least the last several years.”
The Index is derived from a number of underlying components, most of which, Bedikian pointed out, remained strong during the third quarter of 2019.
• While the Manufacturing and Non-Manufacturing Purchasing Managers’ Indexes (PMIs) from the Institute of Supply Management (ISM) were down from second-quarter readings, the ISM Non-Manufacturing PMI remained in expansion territory.
• The ISM Manufacturing PMI declined enough to signal contraction in the sector, with the ongoing trade war between the U.S. and China a likely key driver of uncertainty for manufacturers.
• National unemployment figures decreased during the quarter and, while wage growth slowed from the previous quarter, it remained at a healthy level.
• Proprietary measures of business activity among Citizens Commercial Banking’s more than 7,000 clients across the United States remained strong.
The Index draws from public information and proprietary corporate data to establish a unique view of business conditions across the country. An index greater than 50 indicates an expansionary trend and points to improved business growth for the next quarter.
Job figures
The fact that the unemployment rate is either slightly dropping or holding steady doesn’t necessarily mean it’s all good news for the state’s workers.
In Michigan, for instance, the seasonally adjusted unemployment rate was essentially unchanged in October, inching down by a tenth of a percentage point above the state’s October 2018 rate, to 4.1%, according to data from the Michigan Department of Technology, Management & Budget. The U.S. jobless rate edged down over that period by two-tenths of a percentage point.
However, payroll jobs fell sharply by 22,000, or 0.5%, over the month, due largely to a strike in the auto industry that began Sept. 16 and ended six weeks later (persons on strike are counted as employed, having no impact on the unemployment rate. However, they are not included in the count of jobs, contributing to fewer payroll jobs.).
Nationally, the jobless rate advanced by one-tenth of a percentage point over the month and was 0.5 percentage points below the Michigan rate.
“Michigan payroll jobs fell temporarily in October due to the large, nearly six week-long strike in the auto sector,” said Jason Palmer, director of the Bureau of Labor Market Information and Strategic Initiatives. “Job levels in the manufacturing sector should rebound, as autoworkers are now back on the job.”
Chausovsky called the employment figures a “lagging indicator” that reflects the economy “after the fact.” While acknowledging people do have jobs and are starting to see a rise in wages, he issued a caution about how to keep it going.
“Our main piece of advice is to make sure you’re retaining top performers and don’t look at the mild lull in activity next year as a reason to cut back,” he said. “You should look at it as a way to keep people for the rise in 2021.”
Trade policies
U.S. trade policies under President Donald Trump could also have an effect on the economy, according to Chausovsky, who said there are “typically winners and losers” when it comes to tariffs.
Some companies benefit from these kinds of protectionist trade policies, he said, while others don’t.
He tells the story of the Whirlpool Corp., the largest domestic manufacturers of washing machines. In 2017, he said, Whirlpool lobbied the International Trade Commission, which then imposed a 20% tariff the following year.
Since then, he pointed out, the consumer on average has spent $90 more on a washer than in the past. The really interesting thing is, he said, despite the fact there’s no tariff on dryers, consumers were paying higher prices on dryers.
“When the price of washing machines went up, so did the price of dryers, despite the fact there was no tariff,” Chausovsky said. “It highlights the fact that there are unintended consequences because of these protectionist trade policies.
“We advocate letting the market figure it out,” he added. “U.S. exports have declined by 8% over the last year and we believe it’s partly because of protectionist policies, and reciprocal policies by other countries.”
The Federal Reserve Bank of Chicago’s Traub said consumers are starting to shy away from goods affected by the tariffs, because prices on those goods are starting to rise. That means instead of going to a more high-end store like Lord & Taylor, for instance, shoppers are looking for better deals elsewhere.
And the tariffs are beginning to have a negative effect on the economy, according to Traub. Not a debilitating one — there is still growth, just smaller — but an effect nonetheless.
“When you have tariffs, not only are you not selling your own goods, you’re not buying (from other countries),” said Traub, who pointed out that trade was an average 2.8% prior to the tariffs, as opposed to some 1% now. “That means the world is slowing down. You’re buying less stuff from China, so China is slowing down. You’re buying less stuff from Europe, so Europe is slowing down. And they’re buying less stuff from the U.S., so the U.S. is slowing down.”
