ATLANTA–A maturing business cycle, the ongoing global slowdown, and the U.S.-China trade spat are fostering a deteriorating business investment climate, and a slowdown in job growth has made consumers wary of spending, according to Rajeev Dhawan of the Economic Forecasting Center at Georgia State University’s Robinson College of Business.
“Investments are always a risky bet. And as the amount of uncertainty rises, investment spending is the first to suffer,” Dhawan wrote in his “Forecast of the Nation,” released today (Nov. 20, 2019).
The Global Economic Policy Uncertainty Index, at its highest level since 1997, has been extremely elevated for the past 18 months. Dhawan attributes the uncertainty in no small part to the imposition of tariffs by the world’s two largest trading partners, the U.S. and China, on each other’s exports.
“Although there are other trade skirmishes [between Japan and Korea, the ongoing Brexit saga, the Catalonia secession in Spain, and even the September missile attack on Saudi oil facilities] the U.S.-China trade spat takes center stage.”
The forecaster posits that as management of U.S.-based global companies consider moving factories out of China and undoing supply chains they spent decades establishing, “their primary focus is on the vexing issue of building new supply chains and not on expanding existing business capacity, i.e. hiring.”
The fallout is readily apparent in investment growth rates. Business investment declined 3.0 percent in the third quarter of 2019, after dropping 1.0 in the previous quarter, which was a dramatic contrast to the first half of 2018, when investment grew 8.4 percent following the Tax Cuts and Jobs Act of 2017. Two other factors, or shocks, contributed to weak investment – reduced fracking investment due to falling oil prices, and the impact of the March 2019 grounding of the Boeing 737 MAX on high tech manufacturing. Looking forward, the Institute for Supply Management Manufacturing Index is below 50, signaling future contraction in the industrial sector.
As for consumer confidence, a 10-point market drop since Aug. 2019 could signal a consumption growth slowdown. The last three Federal Reserve rate cuts should have boosted consumption by lowering interest rates for car loans and on new or refinanced mortgages. However, Oct. 2019 vehicle sales of 16.5 million units were much lower than the average 17.0 million units sold the previous three months.
Damage from the last few quarters of deficient investment growth will be evident in subpar GDP growth, less than 1.5 percent on average in the coming quarters. And Dhawan characterizes business investment equipment growth as “nonexistent” until Boeing’s woes end in mid-2020.
“As growth drops well below the 1.8 percent growth potential, the Fed will be forced to cut rates several times in early 2020, most likely during the March and June meetings of the Federal Open Market Committee,” Dhawan said.
Even with these cuts, Dhawan anticipates GDP growth to drop to 2.3 percent in 2019, then decline to 1.5 percent in 2020 and improve to 1.8 percent in 2021.
“The election will be over by 2021, hopefully, and no matter who is in the White House, businesses can plan again with somewhat more certainty than at present,” Dhawan said.
Highlights from the Economic Forecasting Center’s National Report
- Overall GDP growth will be 2.3 percent in 2019, 1.5 percent in 2020 and 1.8 percent in 2021.
- Investment growth will be 2.2 percent in 2019, 0.3 percent in 2020 and 2.5 percent in 2021. Monthly job gains will be 165,300 in 2019, drop to 90,600 in 2020 and rise to 94,700 in 2021.
- Housing starts will average 1.256 million in 2019, 1.215 million in 2020 and 1.220 million in 2021. Vehicle sales will average 16.9 million in 2019, 15.8 million in 2020 and 15.5 million in 2021.
- The 10-year bond rate will average 2.1 percent in 2019 and 2020, then rise to 2.7 percent in 2021.