US President Donald Trump’s case for re-election in 2020 comes down to his economic record. New forecasts from two Federal Reserve banks, though, warn of near-recession conditions just as the presidential election campaign is getting underway.
Both the New York Federal Reserve “Nowcast” model and the Atlanta Federal Reserve’s “GDPNow” model predict that US economic growth will slow to barely above zero during 2019’s fourth quarter. Both models translate the latest data releases from government agencies into overall GDP growth. The NY Fed’s forecast stands at 0.4% annualized GDP growth and the Atlanta Fed model shows just 0.3%. This degree of convergence is rare, and the dip from an estimated 1.9% growth rate during the third quarter to 0.3%-0.4% is alarming.
Eighteen months ago the Trump Administration advertised the Atlanta Federal Reserve’s forecast as proof of its success. Treasury Secretary Steve Mnuchin told CNBC in June 2018, “The Atlanta Fed is projecting 4.7% [GDP growth]. I have no idea whether it will be that high. But a year ago, people were laughing when we talked about 3% GDP. We have an economy that’s here because of the president’s tax plan and the president’s regulatory relief.”
The administration isn’t bragging about the Atlanta Fed’s present forecast of just 0.3% annualized GDP growth.
Since then GDP growth has fallen below 2%, as businesses cancel capital investment plans in response to uncertainty about global supply chains, following the Trump Administration tariff war on China and threatened bans on technology exports to Chinese companies. Consumer spending kept the economy growing despite shrinking CapEx and a manufacturing recession that is now in its third quarter. At just 12% of GDP, the manufacturing recession isn’t enough to tip the overall economy into recession.
The new Fed forecasts indicate that US consumers are nearing exhaustion.
If the Trump Administration goes through with its threat to impose a new 25% tariff on an additional $160 billion of Chinese imports, including most consumer electronics, the US economy is likely to tip over the edge into recession in 2020.
With a $1 trillion budget deficit and an expanding Federal Reserve balance sheet, the US economy has generated enough demand to keep GDP growth close to 2% during the past couple of quarters. But the consumer shows signs of flagging. Retail sales were up just 3% year-on-year as of the preliminary October release from the US Census Bureau. With core inflation rising at a 2.3% annual rate, that puts real retail sales growth at well under 1% – not enough to carry an economy burdened by declining CapEx and industrial output.
Auto sales have been negative year on year through most of 2019.
A breakdown of the year-on-year change in dollar volume at the same stores published by the private data firm Spendtrend shows that consumers have reduced purchases of higher-end discretionary products.
Part of the reason for weaker than expected retail sales growth is that consumers are saving a bigger proportion of their income. The personal savings rate has risen from about 6% of disposable income at the time of Trump’s inauguration to about 8.5% now.
Heightened precautionary savings by US consumers is consistent with gloomier expectations about the labor market, according to the Conference Board’s latest monthly survey. The percentage of Americans who believe that jobs will be more plentiful in six months from an early 2017 peak of 24% to only 16% today, close to the slow-growth years of the Obama administration.
Another indicator of risk aversion can be inferred from the Atlanta Federal Reserve’s data series for wage growth among people who remain in their jobs vs. those who switch jobs. Job stayers prefer security to the prospect of a raise, while job switchers are more risk-friendly.
As this chart makes clear, the overall level of wage growth for US workers is close to the level of job stayers during the past few months. In early 2017, by contrast, the overall level was closer to that of job switchers. That means, simply, that more people are keeping their present job rather than taking the risk of switching in return for higher pay.
Investment, meanwhile, remains weak and fell sharply into the negative during the third quarter.
With manufacturing still contracting and capital investment shrinking, a modest pullback by US consumers would realize the glum forecasts of the New York and Atlanta Federal Reserve banks.