Published in Economic Development

As economy nears record period of expansion, questions emerge over timing of next downturn

BY Sunday, May 19, 2019 09:03pm

Everybody knows the U.S. economic expansion that’s approaching a decade in duration will eventually come to an end.

When that dip will actually occur remains the unknown, as assorted economic outlooks continually predict slower growth ahead, but stop short of forecasting an outright recession.

Greg Carmichael, Chairman, President and CEO, Fifth Third Bancorp

Amid persistent predictions for slower growth, the question of when the U.S. economy will finally sputter has often been a top topic of conversation for Fifth Third Bancorp Chairman, President and CEO Greg Carmichael.

“Right now, for our clientele, it’s just when is the economy going to start to show signs of slowing and potential recession,” Carmichael told MiBiz in a recent interview.

“Everyone’s trying to figure out when this expansion’s going to end. We don’t think it’s a 2019 event. It could be a late 2020 event,” he said. “That could change tomorrow based on the geopolitical situation we’re dealing with — it could accelerate that. So it’s hard to predict, but everyone’s worried about it and everyone’s talking about it.”

A trio of new economic outlooks — two from Lansing, and the other by the University of Michigan — offer similar views to many forecasts over the last year or so by predicting a continued, steady easing of economic growth.

Economists at U-M and at the state House and Senate fiscal agencies — in a pair of reports prepared for state lawmakers with semi-annual economic estimates — see slower growth ahead, although none predict an outright downturn in the foreseeable future.

Nationally, the May 17 outlook issued by U-M’s Research Seminar in Quantitative Economics forecasts 2.6 percent Real GDP growth for the U.S. for 2019 and 1.8 percent for all of 2020. Real GDP growth for 2018 was 2.9 percent

In Lansing, the state House Fiscal Agency predicts 2.6 percent Real GDP growth for the U.S. in 2019. Real GDP expansion eases to 1.9 percent in 2020 and 1.7 percent in 2021, according to the agency’s new outlook issued May 16.

Meanwhile, the Senate Fiscal Agency sees 2.3 percent Real GDP growth this year for the U.S., followed by 1.8 percent in 2020 and 1.6 percent in 2021.

None of the three outlooks outright predict a recession, but as the U.S. economy nears its longest-ever period of expansion at 10 years as of July, economists at the Senate Fiscal Agency do see the risk of a downturn increasing.

“While the forecast does not anticipate an actual recession, it does estimate several quarters of substantially below-trend growth. However, the nature of the economic climate over the forecast period does leave it vulnerable to recession,” according to the Senate Fiscal Agency outlook.

The report’s authors also caution against businesses and consumers overreacting to outlooks for slower economic growth.

“To avoid a recession over the forecast period, even in the absence of any shocks, consumers and businesses not only need to avoid substantial precautionary behavior in the face of this uncertainty, but monetary and fiscal policy decisions must be consistent with maintaining growth,” they wrote in the report.

Both fiscal agencies also forecast continued easing of light vehicle sales. The Senate Fiscal Agency has car and truck sales dipping from 17.2 million units in 2018 to 16.9 million in 2019, then contracting further to 16.6 million units in 2020 and 16.5 million in 2021.

The House Fiscal Agency predicts light vehicle sales of 16.8 million units for 2019, followed by 16.6 million next year and 16.5 million in 2021. U-M economists expect light vehicle sales of 16.8 million units both this year and next.

As U.S. economic growth slows and the auto industry follows suit, Michigan’s job growth also will ease.

House Fiscal Agency economists predict job growth in Michigan to dip to 0.9 percent this year, compared to 1.1 percent for 2018. The state’s job growth will slow further to 0.4 percent in 2020 and to 0.2 percent in 2021.

The Senate Fiscal Agent has Michigan’s job growth easing to 0.8 percent for 2019, half that rate in 2020, and then to a virtual crawl of 0.1 percent in 2021.

Even as economic and job growth wane, unemployment in the state, as well as across the U.S., will remain low, keeping the job market tight, according to the economic outlooks.

The ability of employers to find the talent they need remains an issue that Fifth Third’s Carmichael often hears about from customers.

“Every time I sit down with and when I talk to our commercial customers, regardless of the sector, I ask them what’s constraining their growth and it’s labor,” Carmichael said. “As long as labor rates are as low as they are right now and we have full employment, you’re going to continue to see that be a challenge.”

When the U.S. economy does finally turn, Carmichael believes “it won’t be anywhere near as severe as what we saw last time” in the Great Recession of a decade ago.

So far, there’s no indication that businesses or consumers are bracing for a downturn, he said. Fifth Third ended 2018 “with some of the strongest loan production that we’ve had in years,” Carmichael said.

“We’re not seeing anything that’s indicative of our companies pulling back,” he said.

Locally, Fifth Third regional president Tom Welch sees momentum continuing in the West Michigan economy, although there are concerns over trade tariffs and questions about the timing of any future economic slowdown. Clients he talks to “still feel pretty positive.”

“For the most part, what we hear is a majority are positive on hiring, and most are talking about ‘we’re stable’ or ‘we’re going to continue to hire,’” Welch said. “Second is, ‘we see increasing sales.’ Over 50 percent, close to 60 percent are talking about that, and they’re talking about investing in their company.”

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