Federal Reserve building in Washington September 1, 2015. Central bankers from around the world are telling their American counterparts that they are ready for a U.S. interest rate hike and would prefer that the Federal Reserve make the move without further ado. REUTERS
THE economic expansion that began in mid-2009 and already ranks as the second-longest in American history most likely will end in 2020 as the Federal Reserve raises interest rates to cool off an overheating economy, according to forecasters surveyed by The Wall Street Journal.
Some 59% of private-sector economists surveyed in recent days said the expansion was most likely to end in 2020. An additional 22% selected 2021, and smaller camps predicted the next recession would arrive next year, in 2022 or at some unspecified later date.
“The current economic expansion is getting long in the tooth by historical standards, and more late-cycle signs are emerging,” said Scott Anderson, chief economist at Bank of the West, who was among those predicting a 2020 recession.
As for the most likely primary cause of the next downturn, 62% selected an overheating economy leading to Fed tightening. Other options picked by at least 5% of economists surveyed were a financial crisis, the bursting of an asset bubble, a fiscal crisis or disruptions to international trade.
Recessions are notoriously difficult to predict, and sometimes are tricky to recognize even after they start. The recession that began in December 2007 wasn’t officially proclaimed by the National Bureau of Economic Research’s recession-dating committee until a year had gone by. Forecasters saw the chances of a recession rise back in 2011 and in 2016; both turned out to be false alarms.
“Recessions occur because of unforeseen shocks, so by definition there is no meaningful answer,” said Deloitte economist Daniel Bachman, who declined to estimate either the timing or cause of the next downturn.
Still, the predictions in this month’s Journal survey offer insight into the current consensus among professional forecasters: A recession isn’t imminent, but the expansion won’t last forever—and the next downturn might arrive in the thick of the 2020 presidential campaign.
“Any year from 2019 onward is in play,” said Lou Crandall, chief economist at Wrightson ICAP.
The longest expansion tracked by the NBER dating panel, going back to 1854, was the information-technology-fueled 1990s boom that lasted 10 full years. May marks the 107th month of the current expansion, surpassing the 106-month expansion of the 1960s, and forecasters have become increasingly confident the current expansion will set a longevity record by extending into the second half of 2019.
Indeed, in the near term, forecasters think the U.S. economy is on solid footing.
On average, economists predicted gross domestic product will expand 2.9% in the fourth quarter of 2018 compared with a year earlier, up from 2.6% growth in 2017. The unemployment rate, which fell to 3.9% in April, was expected to slide further to 3.7% by the end of this year and 3.6% by mid-2019. The average risk of a recession in the next 12 months was pegged at 15%.
Forecasters do see risks looming, with many mentioning mounting tensions over U.S. trade policy. Some 60% of economists saw greater risk that growth would undershoot expectations than overshoot over the next year.
One bright spot: Economists think long-sluggish U.S. productivity growth is poised to pick up at least modestly in the next few years.
Labor-productivity gains averaged just 1.2% a year in 2007 through 2017, according to the Labor Department, a weak trend that threatens to restrain the pace of economic growth. After remaining flat in 2016, nonfarm business labor productivity rose 1.3% in 2017, and economists on average predicted annual growth will average 1.5% over the next five years.
“More capital investment should help revive productivity,” said Lynn Reaser of Point Loma Nazarene University.
Even more encouraging, 71% of economists said they saw a greater risk that productivity growth would exceed forecasts, rather than disappoint.
The package of corporate and other tax cuts enacted in December is playing a supporting role, but most economists said it isn’t the sole explanation for recent strength in U.S. business investment. Most described tax-code changes as one of several major causes, with just 5% calling them the main cause.
“The tax-code changes should be a major driver of business investment spending, but the monthly orders data have been surprisingly soft thus far,” Mr. Crandall said. “Growing confidence in the global expansion in 2017 would seem to have been a bigger driver thus far.”
The Journal’s survey of 60 business, financial and academic economists was conducted May 4-8; not every economist answered every question. - WSJ
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