- Multiple analysts have pointed to 2020 as the year when the US will fall into a recession driven by tighter monetary policy.
- However, Macquarie says the US economy will revert to slower growth, rather than suffer a hard landing.
- The analysts attributed their view to the rise of the US service sector and improved central bank policies.
If the current US economic expansion stays on track until the middle of next year, it will become the longest in history.
Naturally, speculation is beginning to mount about when it will end. And multiple analysts have highlighted 2020 as the year in which recessionary conditions may return.
However, the global economics team at Macquarie isn’t so sure.
The bank expects the US economy will revert to a “short period of slower growth, rather than the ‘bust’ that many have begun to predict”.
Why is 2020 cited most frequently as the recession year?
Macquarie said the Trump administration’s fiscal sugar-hit — last December’s corporate tax cuts — will have worked through by then, and current legislation points to fiscal tightening in 2020.
In addition, the economic boost from tax cuts will force the Fed’s hand on more interest rate hikes to prevent the economy from overheating.
Macquarie expects the Fed to hike twice more this year and four times in 2019, which would leave official cash rates in the 3.25-3.5% range — above the Fed’s current median forecast of 3-3.25%.
“This could see the yield curve flatten and then invert sometime next year, with history suggesting that a recession could follow 12 to 18 months later,” Macquarie said.
There’s also the prospect of a prolonged trade war with China. It doesn’t pose a short-term threat to US growth, but more tariffs next year could exacerbate the effects of tighter monetary policy.
Although the US economy will have to navigate through tighter monetary policy and a possible trade war, Macquarie thinks a hard landing is unlikely.
They based their view on a structural shift which has taken place in the US economy – “The rise of the services-based economy”:
“Since 1947 the services share in nominal GDP has increased from 47% to 69%, while that of the goods-producing sector has fallen from 39% to 18%.”
One good thing about that is historically, the services sector has experienced noticeably lower volatility than the goods sector.
“Defining recessions as two consecutive quarters of negative real growth, the goods-producing sector has experienced 14 recessions since 1947, compared to only three for the services sector,” Macquarie said.
In fact, the services-based economy hasn’t had a single recession since the 1950’s.
The analysts crunched some numbers and determined that the rise of service industries had helped to reduce economic volatility by between 29-43%.
The shift has helped underpin what Macquarie referred to as the “Great Moderation” (GM) — the 30-plus year trend in developed market economies of steady growth with low inflation.
While there have been some interruptions to that trend — most notably 2008’s global financial crisis — Macquarie said the evidence suggests markets have largely returned to the GM paradigm.
They said it’s been helped by improvements in monetary policy and financial innovation, as central banks improve their understanding of the global economy.
“This suggests that for the US to have a severe recession, you need a very large domestic imbalance that leads to a dramatic goods bust – as occurred in 2008.”
“While anything is possible, we do not see such an imbalance at this stage.”
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