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Growth is set to modestly accelerate
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For Your Business April 30, 2020

Low recession risk, faster growth, and unemployment at a 70-year low — here are Goldman Sachs' predictions for the US economy in 2020

Goldman Sachs is optimistic about the US economy in 2020.

A team of the bank's economists, led by Jan Hatzius, released a note detailing their predictions for next year.

They expect the US-China trade war to subside and consumer spending to remain strong, offsetting weak business investment and causing growth to accelerate. They also predict unemployment will drop to its lowest level since the Korean War and see the risk of a recession dropping, from one in three earlier this year to one in five.

Markets are likely to remain nervy, however, with a presidential election in less than a year.

Below are Goldman's expectations for the US economy in 2020. 

Growth is set to modestly accelerate

Goldman expects growth to push upward in 2020 and cites four main reasons:

  1. The bank expects "the drag from the trade war to fade gradually." The bank's economists think that a "phase one" deal will be signed this year and that the December 15 tariffs will be removed. Goldman Sachs released a note on how the trade war dragged growth down, which hit real incomes and tightened financial conditions. But by the end of 2020, Goldman expects this drag to disappear.
  2. "Driven by both the better trade news and easier monetary policy, the sharp tightening in financial conditions in late 2018 has now fully reversed," the bank said. According to the economists' research, this is already showing in housing data.
  3. Consumer spending is also expected to outlast weak business investment. "Healthy consumer confidence and solid gains in disposable income growth and household wealth should keep consumption growing at a roughly 2.5% pace next year. Meanwhile, some of the recent weakness in business investment — especially in the energy and aircraft categories — is likely to prove temporary."
  4. "The drag on goods-sector output from the inventory adjustment is probably nearing an end," Goldman's economists said. They added that since the first quarter of 2019, "inventory investment as a share of real GDP hit its highest level since mid-2015, the monthly numbers have slowed steadily and the inventory components of both the ISM and the Markit PMI have fallen below 50."

As a result of this, they expect a "modest acceleration" in growth in 2020 to between 2.25% and 2.5%. 

Another solid year of job creation ahead

Goldman Sachs

Goldman's economists say "a year of above-trend growth should mean another year of solid job creation."

They expect nonfarm payroll growth to stay above the 100,000 breakeven point and the unemployment rate to continue to trend downward. The bank is forecasting unemployment to hit 3.25% by the end of 2020, which it says would be the lowest rate since the Korean War. 

Wage growth should also rise by about 3.5%, as shown in the graph above, with those on lower incomes set to gain the most. 

The Fed has set a high bar for changing interest rates

After delivering three interest-rate cuts this year, the Federal Reserve seemed to indicate that it "would need to see a really significant move up in inflation that's persistent before we even consider raising rates to address inflation concerns." As a result of this, the bank expects fund rates to remain unchanged in 2020. 

The risk of a recession is set to drop

Earlier this year, the bank's economists put the risk of a US recession within the next 12 months at one in three. Now it's cut the chances to one in five. 

"The current expansion is now the longest in US business cycle records dating to the 1850s, and some recession fears may simply reflect an instinctive sense that its time is nearly up," the economists said. 

"This has not been an unreasonable thought historically, as the two usual late-cycle risks—inflationary overheating and financial imbalances—often did grow over time. But so far both risks look limited," they added. 

The 2020 election

Goldman says next year's elections are "likely to be the single biggest event for financial markets in 2020." The bank will be keeping a very keen eye on what happens in the next year. 

Goldman anticipates a tight race. It notes that while the incumbent usually stays in office, the President is battling low approval ratings.

There could be changes for the Senate, too, according to the bank: "Prediction markets currently imply a 36% probability of a Democratic majority in the Senate. In light of the fact that outcomes of competitive Senate seats and presidential elections are correlated, this is probably also close to the implied probability of unified Democratic control."

If one of the four frontrunners for the Democratic nomination does win the general election, Goldman thinks the federal corporate income tax rate would most likely be upped from 21% back toward 35%. Goldman says it would "reduce S&P 500 earnings in 2021 by 11%" if it were to go all the way back to 35%.

This article was written by Yusuf Khan from Business Insider and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to legal@newscred.com.

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