The economy has battled a lot of headwinds during the past year. Trade wars. The lagging impact of the Federal Reserve's interest-rate hikes. A government shutdown. The good news is that with those hiccups mostly out of the way, the economy may be poised for better performance in 2020.
The easiest way to show this might be the example of the government shutdown. It feels like ages ago, but the federal government was closed for 35 days in December and January. The direct costs of that were estimated to be 0.1% of gross domestic product in the fourth quarter of 2018 and 0.2% in the first quarter of 2019. Indirect costs may have been higher, particularly given the fact that the shutdown began when the stock market was already swooning and dragging down consumer and business confidence. Although we can't rule out another shutdown, avoiding one would mean an environment without that lost output.
The impact of the Fed's monetary policy will be another way in which 2020 should be better than 2019. This time a year ago the housing market was slumping after 2.25 percentage points of interest-rate increases. Residential fixed investment was a 0.2% drag on GDP in the fourth quarter of 2018 and a slight headwind to growth in both the first and second quarters of 2019. But heading into 2020, the housing market will be digesting three interest-rate cuts. Shares of homebuilding companies have rallied in anticipation of rising housing sales and construction, and the third-quarter GDP report showed that residential fixed investment gave a boost to growth for the first time since the fourth quarter of 2017. We should expect that to continue for at least a couple of quarters in 2020 as the housing market rebounds.
With the trade war, it's hard to come up with an exact price tag. But it surely delivered a hit to business confidence, and the tariffs hurt agriculture, manufacturing, technology and consumer goods. What seems probable at this point is that trade tensions won't be as harmful to growth in 2020 as they were in 2019. During the past year or so, the economy had to absorb the costs of the tariffs while business investment declined amid rising uncertainty. Yet the absence of any change would, by way of comparison, be beneficial. And there's at least a chance that some tariffs could be unwound, which would be a plus for 2020.
A couple of other catalysts in a back-to-normal environment would make 2020 look brighter than this year. Flooding in the Midwest during planting season dealt an additional blow to a region and industry that was already reeling from the trade wars. More typical weather in the Midwest next spring should make it a better year for farmers than they had this year.
And Boeing Co. could provide an additional boost to manufacturing if it resumes sales of 737 Max aircraft next year. Even if it doesn't, the Max won't be a drag on industrial production and factory orders again; the damage from grounding the plane has already been felt, so that shock is out of the way.
Put it all together and you have a compelling list of potential positives for growth by merely not having or reversing some of the negative events of the past year. This news should be particularly welcome for the Midwest and the agriculture and manufacturing industries, not to mention President Donald Trump.
This doesn't necessarily mean it will be a roaring year for financial markets; arguably, much of the gains of this year have come from the shift in the Fed's posture from hawkish to dovish, and this already is reflected in prices of stocks and bonds. It's even possible that faster growth next year could make overheating and inflation the Fed's primary concern, which could lead to rate increases that put a damper on markets. Next year's presidential election also could become a source of concern for investors, much as it was in 2016.
That said, the circumstances that created headwinds during the past year should dissipate, making 2020 feel a lot better than 2019.
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