2020 Session Revenue and Budget Outlook Robert P. Vaughn, Director Anne E. Oman, Fiscal Analyst House Appropriations Committee November 19, 2019
1 Snapshot of U.S. Economy • The U.S. economy is growing, with GDP growth of 2.0% in the second quarter of 2019 and the first estimate of Q3 2019 posting a gain of 1.9% • IHS forecast expects GDP to grow 2.1% in 2019 and 2020 • Growth in GDP aided by strength in consumer spending • The U.S. economy added 128,000 jobs in October. The monthly average payroll gain for CY 2019 of 167,000 indicates that job growth remains solid • The current unemployment rate is 3.5% • Initial unemployment claims show no signs of rising layoffs • Recent economic activity in the manufacturing sector has contracted, although the overall economy grew for the 126th consecutive month • Employment in manufacturing trended up in October, a 1.4% increase over September, Although manufacturing loss 4,447 job in October, on a year-over comparison shows manufacturing employment is up 54,000 jobs • Trade uncertainty continues to dampen business investments, manufacturing and farmers
2 Snapshot of U.S. Economy • Consistent with a tight labor market, strong growth of hours worked, and an acceleration in hourly compensation, economists expect real Disposable Personal Income (DPI) growth to remain strong, registering 2.8% growth in 2019 (Q4/Q4) • Forecast growth of 2.2% in 2020, and 2.4% in 2021 • Retail sales are expected to grow between 4.3% - 4.8% for the holiday season according to National Retail Federation’s annual forecast • Job growth and higher wages is the cause for optimism • Overall home sales are up 3.9% from a year ago according to the National Association of Realtors. Total housing inventory declined 2.7% from a year ago, driving up prices • Recession risks are somewhat elevated due to a global slowdown and trade wars. Both the New York Fed and IHS probability models suggests about a 30-35% chance of a recession beginning in the next 12 months
3 Is a Recession Coming? Here Are Some Key Indicators To Follow • Inverted Yield Curve: When the yield curve inverts, it's because investors have little confidence in the near-term economy. They demand more return for a short-term investment than for a long-term one • GDP : Broadest measure of an overall economy’s health. Technically, we enter a recession when we have two consecutive quarters of negative GDP growth • ISM Index : Measure of the overall health of the manufacturing industry via its PMI Index. It shouldn’t read below 50, as anything under that represents a contractionary environment • NMI Index: Measure of the overall health of the non-manufacturing industry
4 Is a Recession Coming? Here Are Some Key Indicators To Follow • Employment Indicators : Several employment statistics can signal trouble in the economy • A decline in employment & hours worked — especially for more than a month or two in a row — can signal a slowdown in employment • An increase in unemployment claims is also troubling • Unemployment rate, labor participation rate, quit rates, and job openings • Leading Index for the United States: This is an index published monthly by the Federal Reserve Bank of Philadelphia used to predict future movements of the economy • Consumer Confidence : Details consumer attitudes and buying intentions. Whether consumers feel confident about spending and the present or future trajectory of the economy tells us a great deal about where our fortunes are headed. At present, this index continues to demonstrate persistently positive consumer attitudes regarding the economy
5 When a Yield Curve Inverts, It's Because Investors Have Little Confidence In The Near-term Economy • If investors believe a recession is imminent, they'll avoid any Treasury bill with maturities of less than two years, sending the demand for those bills down, and their yields up, and inverting the curve 10-Year Treasury versus 3-Month Treasury 3.20 2.70 2.20 3-month 10-year 1.70 1.20
6 Survey of 60 Economists’ Expectations of When Next Recession Starts 40.0% 34.2% 35.0% 29.3% 30.0% 25.0% 20.0% 14.6% 15.0% 10.0% 7.3% 7.3% 7.3% 5.0% 0.0% 2020 2021 2022 2023 2024 2025 Source: Wall Street Journal November 2019 Economic Forecasting Survey
7 Did The U.S. Economy Really Slow Down? • GDP is the broadest measure of the U.S. economy, however, many economists believe Final Sales to Domestic Purchasers is a better measure of the strength of the U.S. economy. Final Sales to Domestic Purchasers measures personal consumption of expenditures (PCE) and private fixed investment, and excludes trade, government spending and inventories • Much of the slow down in Q2 GDP was driven by businesses drawing down their inventories. But lower inventory levels now could translate into fewer layoffs later • Preliminary estimate of Q3 GDP registered at 1.9%, beating expectations, with consumer spending rising 2.9%. Business investment continues to be a drag on GDP • “For manufacturers, the biggest challenges remain finding skilled labor and trade uncertainties, which make it difficult to hire and expand business operations,” said Chad Motray, chief economist at the National Association of Manufacturers GDP and Final Sales To Domestic Purchases 6.0 5.0 GDP Real Final Sales 4.0 3.0 2.0 1.0 0.0
8 PMI Index Below 50% for the Third Month, Although October Rose to 48.3%, and the Overall Economy Grew for the 126 th Consecutive Month Purchasing Manager’s Index • The latest reading points to the steepest 60 contraction in the manufacturing sector since June 2009 58 • Despite the contraction, manufacturing 56 employment remains positive, with October year-over-year growth of 54 49,000 employees 52 • Monthly decline of October manufacturing employment reflected the GM strike 50 • Average weekly hours are holding up • “For manufacturers, the biggest 48 challenges remain finding skilled labor 46 and trade uncertainties, which make it 48.3 difficult to hire and expand business 44 operations,” said Chad Motray, chief 42 economist at the National Association of Manufacturers 40
9 NMI Index Remains Above 50%, With October Increasing to 54.7%. Overall, the Index Indicates Growth for the 123 th Consecutive Month • The 13 non-manufacturing Non-Manufacturing Index 62 industries all reported growth in October 60 • All but 1 of the NMI index's 58 remain above 50% 56 • Imports have contracted for 2 consecutive months 54 • The employment index 52 increased 3.3% in October to 53.7% 50 • Labor shortage remains a major 48 factor in some industries
10 Record Market Highs Reflect Upbeat Q3 Corporate Earnings, But Q4 Earnings Are Expected to Weaken • Equity markets have hit new record highs in November, buoyed by better than expected earnings report • 90% of the S&P 500 companies have reported third-quarter results, with nearly 75% beating profit expectations • Although many of the earnings had been lowered in the second-quarter • On a year-over basis, third-quarter earnings declined 2.4% • Expectations around U.S.-China trade talks remain a positive force for the market • Latest data has also improved sentiment, with the ISM services index easing concerns that a slowdown in the manufacturing sector was spreading to other parts of the economy • Looking ahead, analysts see a year-over decline in the fourth quarter, followed by positive growth in 2020
11 Average Monthly Employment Gains Have Slowed, In Part Reflecting A Tight Labor Market • 2019 year-to-date average monthly Average Monthly Employment Gains (Thousands) employment gains have slowed to 250 167,000 versus 223,000 in 2018 227 • However, large revisions in August and 223 September bring the three-month average to 176,000 200 193 • Manufacturing employment remains 179 positive on a year-over basis. Employment 167 declines in October attributable to the GM strike 150 • A number of factors have contributed to the employment slowdown: • Historically low unemployment rate, and 100 high labor force participation • Lack of qualified workers • Slowdown in production due to trade uncertainty 50 • Average work week remains solid • Average hourly earnings have outpaced inflation 0 2015 2016 2017 2018 2019 YTD
12 Average Hours Worked Has Remained Fairly Consistent, While Worker Wage Gains Have Outpaced Inflation Average Weekly Hours Worked Real Hourly Wage Gains (year-over-year percent change) 43.0 2.50 2.00 41.0 1.50 39.0 Manufacturing 1.00 Al Employees 37.0 0.50 35.0 0.00 33.0 -0.50 31.0 -1.00
80.0 80.5 81.0 81.5 82.0 82.5 83.0 83.5 Unemployment Rate At a 50 Year Low, U-6 Rate At a 19 Year Low 2007-10-01 Job Market Participation is Rate Back At Pre-Recession Levels, 2008-04-01 2008-10-01 2009-04-01 2009-10-01 Participation Rate 25 - 54 2010-04-01 2010-10-01 2011-04-01 2011-10-01 2012-04-01 2012-10-01 2013-04-01 2013-10-01 2014-04-01 2014-10-01 2015-04-01 2015-10-01 2016-04-01 2016-10-01 2017-04-01 2017-10-01 2018-04-01 2018-10-01 2019-04-01 2019-10-01 10.0 15.0 20.0 25.0 30.0 0.0 5.0 2007-08-01 2008-02-01 2008-08-01 2009-02-01 2009-08-01 2010-02-01 Unemployment Rate 2010-08-01 2011-02-01 2011-08-01 2012-02-01 2012-08-01 2013-02-01 2013-08-01 2014-02-01 2014-08-01 2015-02-01 2015-08-01 2016-02-01 U-6 Rate Rate Unemployment 2016-08-01 2017-02-01 2017-08-01 2018-02-01 2018-08-01 2019-02-01 13 2019-08-01
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