By Jeff Korzenik, Chief Investment Strategist for Fifth Third Bank
Published: January 20, 2020
Continued Growth, but Not So Fast
In December of 2018, we took a minority opinion. Counter to what many of the experts were saying and what many other banks were doing, we raised our equity allocation. We've been saying for a long time that the U.S. economy is in the late stages of its current economic growth, and at the time we saw 2019 as a relatively stable growth year.
We were right.
Looking to 2020, we're still seeing a year of growth—but not quite at the pace we saw in 2019. Not so fast. Not so robust. But strong enough that we don't need to be overly gloomy about an economic recession in early 2021 either.
Here are some reasons why we're still predicting growth for 2020, and some trends we should all be watching in the coming months.
Low Unemployment Rate, Low Labor Participation Rate
We are still in a labor-deprived economy. A low unemployment rate—the percent of people who are actively looking for work but haven’t been able to find it—typically marks the end of an economic cycle.
What's different now than other times there have been significant dips in the unemployment rate is the labor force participation rate. Defined by the Bureau of Labor Statistics as "the participation rate is the percentage of the population that is either working or actively looking for work. The labor force participation rate is calculated as: (Labor Force / Civilian Non-institutional Population) x 100," it's remained about the same since 2014—when it hit its lowest in decades. It continues to hover around 63 percent. We believe this leaves more room for our labor market to expand and our economic expansion to continue, but labor conditions are getting tighter.
Some potential factors impacting the labor force participation rate include:
- Three months of decline in foreign-born working age employment. In the U.S., we subsidize our work force through immigration—and, for various reasons, immigration has been declining.
- Retirement is likely picking up because more and more boomers are leaving the work force.
- Partially offsetting these tightening factors are continued improvement in female labor force participation rates and the increasing (but still small) percentage of over-65 workers who stay employed.
So signs point to a labor market that will continue to get tighter—not looser. This should ultimately benefit consumers who have more leverage and negotiating power when it comes to jobs and salaries. With around 70% of economic growth tied to consumer spending, higher wages and salaries lead to higher consumption.
Millennials Coming Into Most Productive Years
As the older-end of the Millennial generation enters their late 30s and the younger-end enters their mid-20s, so begins an era of their greatest increases in earnings and productivity. And because of increased birth rates in the 1980s and 1990s (the creation of the “Millennials”), they're entering this era as a proportionally greater part of the workforce. That demographic makeup is quite favorable to increased economic growth and productivity over the next 10 years—helping continue 2020 growth and temper that next recession.
Rebound from Downturn in Capital Investment
At the beginning of the trade wars between the U.S. and China, there was uncertainty. Uncertainty brings a decline in business confidence, which means a falloff in capital investment. And a decline in capital investment typically means a decline in economic growth—which is exactly what we saw throughout 2019, particularly in manufacturing.
With the phase-one trade deal between the U.S. and China announced in Q4 of 2019, we're likely to see a slight reversal in those declining trends in 2020—but likely not for 6 to 8 months. There's typically a long lag time as businesses and investors warm back up to capital investment, so the economy should see a rebound in Q3 or Q4 of 2020, helping push the economy toward better growth as we close out the calendar year.
Markets Like Stability, Elections Breed Instability
Historically speaking, the best years of a presidential term for equity markets are year three. There are different theories about the reasons—governments may be focusing on pumping up the economy for their upcoming run, central banks don't typically like to tighten interest rates in advance of an election—and for President Trump, 2019 was true to form.
Overall, markets prefer incumbency. There is a bias toward stability. And putting aside any seemingly spontaneous decisions from this presidency, investors overall still understand the path being laid out by this administration. That will be something to look for in the 2020 elections.
Markets Like Gridlock, Elections Sometimes Bring Mandates
In addition to stability, markets tend to prefer split governments—meaning a split Congress (House and Senate each led by different political parties) or a split federal government (Congress and the Executive each led by different parties) or both. The idea is that split government means less change; one party controlling both chambers of Congress and the Presidency may lead to them being uninhibited in pushing their own ideological agenda.
Overall, the best returns have been when one party did not control both branches of government. So there will be economic impacts of the 2020 elections in Congress as well—but we're hesitant to make any predictions now based on today's polling. If there's no other lesson from 2016, it's to question polls—especially this far out from the election.
Plenty to Look Forward to in 2020 and Beyond
2020 should be a good economic year, but it will be a late cycle year like 2019. And while it is certainly too soon to be speculating on what the next recession will bring—when it will happen, its severity, etc.—there is a lot around the corner signaling progress and productivity, especially as it relates to technology. Innovation solves problems. And here are some trends we're going to be excitedly watching over the next several years:
- Manufacturing of upscale housing and even 3D house printing brings implications domestically and internationally, especially with housing demand currently on the rise.
- Alternative energy and energy storage advancements, including potential leaps forward in key technologies, could have a big impact on how we power everything we do.
- Autonomous driving is a potential game changer that impacts consumer purchasing, yes, but also infrastructure, insurance, and much more.
- Computing power may be overcoming a hurdle soon. There are physical limitations to processing information, but we may be overcoming some of those as we explore quantum computing and its potential to solve problems traditional computers cannot.
- More inclusive hiring to grow our labor force faster. One of our areas of focus has been studying the models of private sector employers who have created profitable systems to bring marginalized workers back to lives of contribution and meaning. We see these trends gaining traction and accelerating.
Economically, 2020 looks a lot like 2019. More and more baby boomers will continue to retire. The dollar has been stable for most of the last 5 years and while our gut suggests it may turn somewhat lower, there’s no compelling argument for worrisome levels of disruption in exchange rates. A modest dip in the dollar would benefit multinational company earnings, exporters and investors in overseas assets. We'll keep an eye on Europe's economic recovery, and the global implications of a modest pickup in inflation. Labor markets will continue to be tight. Wage gains will continue to empower consumers. Cyclical sectors—like manufacturing and housing—will continue to be on the rise. And overall access to credit will still continue to be reasonable.
So while growth may slow a bit, 2020 still looks to be a year of stable economic growth.