Beaconomics Winter | 2019/20
Looking back at the turmoil and off-putting theatrics that have characterized U.S. politics for much of 2019, one item that will not make the year’s ‘list of negatives’ is the health of the nation’s economy—and that isn’t changing any time soon, according to a new forecast released by Beacon Economics. Today, the U.S. economy is in the midst of the longest expansion in recorded history and, despite dour headlines to the contrary, is expected to continue along that same growth trajectory for at least the next two years.
“This outlook puts us squarely on the bullish side of things and outside mainstream opinion, but the facts as we see them simply don’t support a more negative narrative,” said Christopher Thornberg, Founding Partner of Beacon Economics and one of the forecast authors. “Currently, there is little sign of the kind of collapsing imbalances or rapid shifts in aggregate demand that would be capable of pushing the economy into a downturn or even a protracted slow growth slump.” According to the new forecast, U.S. GDP will see 2% plus real growth in 2020 and will move towards 2.5% real growth in 2021. To date, the first three quarters of 2019 have averaged 2.3% growth.
This should not imply that there aren’t stressors on the economy warns the outlook, but rather that nothing on the current horizon rises to the level of imbalance or shock that could cause a downturn. However, Thornberg cautions that the outlook could change and that it is critical to maintain vigilance in monitoring economic trends and activity given the unpredictability and hyper-partisan nature of current U.S. policymaking.
Moreover, while the nation unnecessarily flirts with short-run disasters, looming, long-run threats clearly imperil the nation’s economic health. “The healthcare cost crisis, the desperate need for pension and entitlement reform, dangerous trends in wealth inequality, among other issues are serious and growing risks that are largely being ignored and will come back to haunt us—the only question is when,” said Thornberg.
Like the nation as a whole, California’s economy also continues along a steady growth path, even hitting a number of significant milestones in the last quarter. To date, the state’s unemployment rate has dipped to a historically low 3.9% as both worker wages and employment have reached all-time highs. “The longer the current expansion persists, the closer we are to the next recession,” said Taner Osman, Research Manager at Beacon Economics and one of the forecast authors. “But business cycles do not die of old age and, at present, there are few signs of a slowdown in the state’s economy.”
Much of the confidence surrounding the health of the U.S. economy lies with the consumer. A brief lull in spending growth at the end of 2018 reversed itself by the end of the first quarter of 2019. Consumer spending is now growing at roughly the same pace as U.S. GDP.
Falling interest rates are the reason the nation’s housing market is starting to bounce back with sales of new and existing homes up and home price appreciation beginning to accelerate. Moreover, none of the conditions for a major housing bust are in play… we’ve seen clean mortgage lending, no excess supply being built, and increases in overall affordability as measured by the housing cost share of income for U.S. households.
As a result of record-tight labor markets, many U.S. workers have seen significant jumps in earnings. In 2014, compensation for employees made up 60% of national income compared to 63% in 2019. Notably, most of this income has shifted from corporate profits, which fell from a near record high of over 14% of all national income in 2014 to less than 12% this year.
The one weak spot in the nation’s GDP data in 2019 was in business investment, however, spending is down in this area for a number of narrow reasons, but not many general ones. Weak export data has played some role in slowing investment, but overall, the impact of the trade war with China has been highly overrated.
Employment in California keeps on soaring with the state economy adding 308,000 jobs (a 1.8% growth rate) from October 2018 to October 2019. Fully 40% of this job growth came from just two sectors, Healthcare and Social Assistance, and Leisure and Hospitality, indicative of a growing elderly population and strong consumer health. Notably, the rate of job growth in the nation as a whole, at 1.4%, was lower than in the state over this period.
Home price growth in California finally started to show signs of exhaustion over the past year. The median price for a single-family home in California grew 2.2%, which when adjusted for inflation, means that price growth has effectively been flat. This should not be surprising given the relentless pace of appreciation that has occurred in recent years, something that cannot realistically continue.
Building needed! Building permits in California peaked in the first quarter of 2018 but turned negative in the third quarter—and have remained there throughout 2019. Constrained housing supply will continue to hinder home affordability and limit growth in the state’s labor force.
See our complete analysis for additional commentary on key economic indicators.
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