A recession isn’t on the horizon, thanks to factors like consumer spending, PNC Chief Economist Gus Faucher predicts. The U.S., though, may see slower growth in 2020 thanks to Boeing’s production halt of the 737 MAX airliner, a dragging global economy and uncertainty surrounding trade.
“There’s no reason that the current expansion shouldn’t last through the rest of this year,” he said at a Feb 25 event on the state of the Pittsburgh economy, hosted by the University of Pittsburgh’s Institute for Entrepreneurial Excellence.
The X factor, however, could be an external shock like the coronavirus.
Recessions are generally caused by economic imbalances, and the underlying domestic fundamentals for the U.S. economy look solid. So the current economic expansion — now the longest in U.S. history — should persist through 2020 and 2021. When asked to give odds on an immanent recession, Faucher put his probability at one in three.
Getting the picture
The U.S. economy has a lot of positives. The stock market is generally solid. The housing market is well balanced, and builders are putting up fewer houses than they’d like with the tight labor market.
Businesses are profitable. Consumers are spending because incomes are up, overall debt is at reasonable levels and the saving rate is higher than it was prior to the Great Recession.
“We have seen a little bit of a drop in confidence over the past couple of years, but it’s still at a very, very high level,” Faucher says.
The impact of the coronavirus may be felt in early 2020, especially in the U.S. supply chain and industries such electronics and manufacturers that use plastics. But overall, the optimism measures for businesses and consumers look good.
Economic growth measures also reflect this. Faucher says the U.S. economy is growing at approximately 2 percent, which is moderate, sustainable growth, and therefore imbalances haven’t had a chance to develop.
In addition, no matter who wins the presidential election, Faucher won’t change PNC’s economic forecast, and there shouldn’t be substantive changes in the fiscal policy in the near term. Who is elected may impact the stock market, though.
Despite the positive overall overlook and overall job growth, one area that isn’t doing so well is manufacturing and industrial, Faucher says. States like Pennsylvania, despite a diverse economy, may see lower growth because of problems with low energy prices and a softer manufacturing sector, he says. A lack of labor force growth also continues to be a concern for the Pittsburgh metro area.
A month ago, Faucher would have predicted a rebound in manufacturing activity, but now he expects a continued contraction in 2020, even as activity picks up in the second half of the year.
Investors on the hunt for yield
Business investment, adjusted for inflation, slightly declined over the past three quarters, and the decrease is primarily in structure and equipment. Faucher says that’s partially related to the problems at Boeing and the downturn in energy prices, but a lot of it is due to slower global economic growth and the uncertainty surrounding the trade situation with China.
“Business investment will be soft in early 2020, but that’s a smaller piece of the economy than consumer spending,” Faucher says. “And so, even if we do see further contraction in business investment, the overall U.S. economy can continue to expand.”
Corporate debt is steadily rising, but with interest rates low and with no difficult meeting financial obligations, it’s not a concern yet.
One concern is the unregulated parts of the financial system, which is why the Great Recession was so great.
“There were interconnections in the financial system that we didn’t understand,” he says.
While Faucher believes those connections are better understood now and tighter financial market regulation has created a healthier environment, not everything is regulated.
“There are still — and we talk about this in the banking industry all the time — lots of pockets out there of lending, of financial intermediation that are not subject to regulation that we don’t even have good data on. I think those pockets are growing over time, and I am concerned about their potential impact on the financial system.”
Take private equity, for example. Firms buy publicly held companies, run them privately and take on a lot of debt to do so. Some of that debt comes from banks, but in a world of lower interest rates, investors are searching for yield.
“They are taking on greater risk, and a lot of that risk is outside of the regulated financial system,” he says. “We just don’t know where it is, and there’s always the potential that those pockets could develop and that we don’t recognize it until it’s too late.”
Global concerns
Faucher originally expected the global economy, which slowed in 2019, to pick up this year. However, that has changed now that the Chinese economy is expected to contract in the first quarter of 2020.
“The Chinese economy typically grows at around 6 percent year, so to go from 6 percent growth to a contraction all of a sudden, that is going to be a significant drag on global economic growth,” he says, adding that China’s economy makes up about 15 percent of the overall global economy, which is second only to the U.S.
Faucher, however, expects the Chinese government to undertake efforts to stimulate its economy later this year.
Another concern has been an inverted yield curve, where short-term interest rates rise above long-term rates. This historically has been an indicator of a coming recession. The yield curve inverted at the end of 2019, and then inverted again recently.
Faucher says it’s a worrisome signal for the overall global economy, with negative interest rates, low inflation, low energy prices and the coronavirus pushing down long-term interest rates more than the U.S. economy.
