Economic Growth to Slow Down Through 2020

The latest UCLA Anderson Forecast estimates economic growth will slow down for the next two years. The report predicts that economic growth—which has averaged a slow-and-steady 3% this cycle—will slow to 2% in 2019 and 1% in 2020. Additionally, there are several risks that could cause instability in the economy, increasing the possibility for a recession. Despite the slow down in economic growth, next year will be the longest recovery in history.

“Recessions don’t end because they get old, and recoveries don’t wear out,” Jerry Nickelsburg, senior economist at UCLA Anderson Forecast, tells GlobeSt.com about why the recovery has been so long. “Recoveries end because there are imbalances that build up in the economy until they need correction. By that I mean, you have too much labor and too much capital in a sector that is no longer has the demand that it previously had, or too little in another sector that has growing demand. The way that is corrected it through recession and unemployment of labor and capital. In part because this has been a slow recovery, those imbalances have corrected themselves on-by-one.”

The slow growth in the labor force, thanks to aging demographics and a reduced immigration rate, and flat technology adoption have fueled slow economic growth this cycle. There are also additional pressures on the economy as well, including the trade disputes, rising interest rates and an unsustainable federal deficit. “The data that we have do not indicate imbalances that would cause a recession,” adds Nickelsburg. “We haven’t seen big imbalances yet, but some are starting to build up. There are risks, and one of the biggest is the risk of trade interruption. If we get trade interruption, then we have a sector that is out of balance. That is the kind of imbalance that would certainly trigger slower growth. Will it trigger negative growth? It remains to be seen how severe that is.”

Nickelsburg adds that policy changes could increase the current risks, explaining that there is an inconsistent trade and fiscal policy. “There are potential missteps in policy both in the US and abroad that could make this forecast wrong,” Nickelsburg explains. “That is the elevated risk.”

The economic slowdown might have come earlier if not for the shot of adrenaline for the new tax plan, but that stimulus will run out by 2020. “We have this huge stimulus with increased spending and a big reduction in taxes,” says Nickelsburg. “The way in which that is structured is that there are tax incentives to do investment this year that firms might have otherwise done in 2019 or 2020. That one time shot of stimulus will run out by late next year.”

One area that will not stall, however, is the housing market. The report predicts continued development of housing throughout the US to keep up with the strong demand. “The demand for housing is so strong, we are not predicting any contraction in the number of homes being built,” says Nickelsburg. “In fact, we are forecasting an expansion in the number of homes being built.”