Economic Trends: Consumers carry the economy


Last updated on January 21st, 2020 at 02:00 pm

A year ago, many economic experts predicted that the U.S. economy would slow in 2019.

“There is little doubt in my mind that real economic growth will slow down in 2019,” Michael Knetter, the president and chief executive officer of the University of Wisconsin Foundation and a former staff economist for presidents George H.W. Bush and Bill Clinton, said a year ago.

The economy did slow down in 2019, but not much. After U.S. gross domestic product grew 2.9% in 2018 (the best since 2015), it grew 3.1% in the first quarter, 2.0% in the second quarter and 2.1% in the third quarter of 2019. GDP growth for the fourth quarter is projected at 2.3% by the Federal Reserve Bank of Atlanta. That adds up to only a slight dip in U.S. GDP growth in 2019.

What happened? Consumers, whose confidence has been buoyed by an unemployment rate at or near 50-year lows, have spent enough to keep the U.S. economy’s record-setting growth streak alive, even as many businesses became more cautious largely due to uncertainty from tariffs and trade wars instigated by President Donald Trump.

Trump has been aggressively cutting taxes and regulations to help grow the economy and has criticized the Federal Reserve for not doing more to help out, even though the Fed cut interest rates three times in 2019. The trade wars have hurt some industries, including the agricultural and manufacturing backbone of Wisconsin’s economy, but Trump says they will pay off in the long run with better deals for the United States. Recently, Congress finally moved to adopt the United States-Mexico-Canada Agreement and Trump recently signed a first phase trade deal with China. The new trade deals could boost the U.S. economy in 2020.

Many economists are predicting continued, but still slow, growth for the U.S. economy in 2020. How the economy performs could have a major impact on the presidential election this year.

For more insight on what to expect in 2020, BizTimes Milwaukee editor Andrew Weiland recently conducted his annual interview with Knetter, who will once again provide a macroeconomic outlook at BizTimes Media’s annual Economic Trends event on Friday, Jan. 24 at the Italian Community Center in Milwaukee.

BizTimes: U.S. economic growth slowed in 2019, but perhaps not as much as expected. Why? What is your take on the state of the economy heading into 2020?


Knetter: “The economy indeed remains stronger than most observers and prognosticators would have imagined as we entered 2019, having been through a deep correction in equities and declining consumer confidence in its wake. I believe that the main reason the economy has continued to forge ahead is the major reversal in monetary policy that has occurred over the year. The Fed had been steadily tightening up through the end of 2018 and then sharply reversed course with several rate cuts during 2019 and a suspension of the planned unwinding of the quantitative easing policy that was used to help the economy out of the depths of the Great Recession. The combination of lower rates and greater liquidity was constructive for the equity market, the dollar, consumer and business confidence/expectations, and ultimately spending.

“It is important to note that President Trump has put an unusually high degree of focus on economic performance relative to most previous presidents, as evidenced by relaxation of regulatory actions from many agencies that oversee business, jawboning of the Fed to loosen policy, relatively expansive fiscal posture (tax cuts), and pressure on trading partners. It was clear coming into the year that his odds of reelection would hinge heavily on whether the economy could maintain its momentum far enough into 2020 that he could run against a backdrop of continued growth and low unemployment. He has seemingly used every lever available to him to achieve that objective, including perhaps holding back on resolving the China trade tensions as long as practical to ensure an additional boost as we enter 2020. 

“While it is not possible to parse out attribution for the performance of the economy to the Trump administration, the Fed (who may have cut with or without the president’s pressure), the Congress, or most importantly all the firms and households whose decisions shape our outcomes, we have simply never seen a president as active (sometimes chaotically) in promoting his desired economic policies. And those desired policies put a premium on growth now. They may or may not be ideal for the longer term performance of the economy (we don’t talk much about the federal deficit, but we surely will in the next recession and that will be unpleasant) or the environment. On both accounts, Trump seems to understand the tendency of many Americans toward materialism in the present versus sacrificing today for a potentially better future. He is doing his best to throw shade on conservation practices that many Americans find inconvenient and I suspect this is part of his electoral calculus. 

“So, we have a strong and seemingly stable economy entering 2020. It is the longest economic expansion in U.S. history and it has been marked by uncannily stable growth rates year on year. This likely reflects the continued progress in managing supply chains (avoiding big swings in inventories that previously added volatility) and the continued growth in the service sector as a share of GDP (it is much less volatile than manufacturing and construction). While we are always only one big shock away from growth getting derailed, those shocks are by definition unpredictable and it is hard to see how this expansion dies a policy-induced death anytime soon. With no inflation pressure, it is hard to say we are overheating, even at historically low rates of unemployment. That may be due to the looming threat of technology change and innovation that can displace labor.”

BizTimes: Confident consumers are powering the U.S. economy right now as businesses have been more cautious. Why is that? Can consumers continue to carry the economy on their backs?

Knetter: “Consumers have indeed shown great confidence in their spending behavior and it looks like the holidays put an exclamation point on that trend. Consumers are working and earning and the markets are making us all feel a little wealthier than we probably have a right to feel (given they can go down, too), so I do not see the end of the U.S. consumer as a driver of growth. Businesses have been more cautious in sinking fixed investments in some sectors due to all the trade policy chaos. If that settles down, they might drive the next phase of growth.”

BizTimes: What do you expect for U.S. GDP in 2020?

Knetter: “One way to think of GDP growth is the growth in hours worked plus the growth in productivity. I think we will grow at less than 2% on the year, maybe 1.7%, simply due to the math of lower growth in employment (due to declining growth in new entrants and not many unemployed workers to be absorbed into jobs) and the low likelihood of a surge in productivity growth. The less certain of these two factors is the productivity growth. It is possible that we are riding a wave of labor-saving technology that can boost output per worker and temper wage growth.”

BizTimes: The U.S. unemployment rate is at a 50-year low. Job growth is slowing as many businesses say they are struggling to find people to hire. This labor market is obviously good for workers, but isn’t it a problem holding back business growth?

Knetter: “You are right that the tight labor market is holding back business growth, but it is hard to label low unemployment a ‘problem.’ It is a fact of life right now and firms with the best growth opportunities will have to pull workers away from firms that are more marginal in order to grow. That may be the key to boosting productivity.”

BizTimes: With that tight labor market, wages finally are rising. Will we see that accelerate in 2020?

Knetter: “I do think we will see that accelerate in 2020. But I thought we would see more of that in 2019 and I was mostly wrong about that. Here’s to better luck in 2020!”

BizTimes: “Tariffs on U.S. goods in response to President Trump’s multi-front trade war have been a burden for the U.S. economy and especially for manufacturers and farmers. Now that Congress has approved the United States-Mexico-Canada Agreement and a preliminary phase one trade deal has been reached with China, where do you think things stand for the U.S. economy and trade? What impact will these new deals have on the U.S. economy in 2020?

Knetter: “The resolution of these two fronts of the trade war will be constructive for business confidence and the economy in 2020. I say this without having read all the details of these agreements, but knowing that any agreement at this point is likely better than continued uncertainty about the rules. I prefer a multilateral, rules-based trade regime in theory, so I am somewhat uncomfortable with all of the bilateral efforts that have been undertaken by the current administration. But more clarity on our situation is going to help people make decisions, assuming they feel fairly confident the new rules will last for a good while.”

BizTimes: The Federal Reserve cut interest rates three times in 2019. President Trump complained often that the Fed was not being aggressive enough to help the U.S. economy. What do you expect the Fed to do in 2020?

Knetter: “I think 2020 will be a quieter year for the Fed simply because right now we seem to be in the ‘Goldilocks’ economy. Not too hot, not too cold. Until it moves toward inflation and overheating or a growth slowdown, I think the Fed will sit back and watch.”

BizTimes: Is inflation something we need to worry about right now? What about the growing national debt?

Knetter: “There is no strong sign of inflation at the moment, but we need to be vigilant given the tight labor market. I’m more concerned about the national debt. If inflation did materialize, nominal interest rates would likely rise and the cost of financing the existing stock of debt would rise along with them. And even if rates stay low for now, piling on more and more debt seems unwise to me. Both monetary and fiscal policy seem to me to be favoring the current generation at the expense of future generations. While I am not saying that is totally surprising for a nation as materialistic as we seem to be, it does worry me. I don’t think our generation is leaving a great legacy on economic, environmental, geopolitical or social dimensions. But I’m going out to dinner tonight!”

BizTimes: The U.S. stock market rebounded in 2019 after a terrible year for the market in 2018. Why? What do you expect from the stock market in 2020?

Knetter: “I believe the Fed policy reversal was the main reason for the turnaround. I think the market will remain strong into the beginning of 2020 (not necessarily going up much more from here but staying on the nice perch we’ve reached, give or take a little) and then will be heavily influenced by the fall election, one way or the other. It is still not clear what the matchup will be for the presidential election and how that might shape market sentiment. One thing that does concern me regardless of the matchup is that the election year rhetoric could be very divisive this fall and that might darken sentiment.”

BizTimes: In the middle of 2019, some were worried that a recession was around the corner. Those fears seem to have passed for the most part. Are we out of the woods as far as having to worry about a recession in the near-term?

Knetter: “I felt a year ago that the looming election meant that the president would do everything possible to hold off a recession in 2019, and that those actions would be enough to carry the economy through the year. Whether that was the reason or not, we are still growing as we enter 2020, and at this point I expect we will be growing as we enter 2021, but much more slowly. We can certainly avoid recession in 2020 given how we will enter the year, but slowing growth can dent confidence of businesses and consumers which can cause a downward spiral. I just don’t see that in 2020 right now unless there are some unexpected dynamics related to the election.”

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Andrew Weiland
Andrew Weiland is the editor of BizTimes Milwaukee. He joined BizTimes in 2003, serving as managing editor and real estate reporter for 11 years. A University of Wisconsin-Madison graduate, Weiland is a lifelong resident of the state. He lives in Muskego with his wife, Seng, and son, Zachary. He is an avid sports fan and enjoys coaching his son’s youth baseball and basketball teams.