If things are so good, why are we still so worried? Business, in general, made it through 2019 in better shape than prognosticators had predicted. Inflation remained in check, unemployment was at record lows, stocks hovered at record highs and consumer confidence remained strong. But despite all the good economic news, many industries remained challenged on several fronts, from the fallout of trade wars and unusually harsh weather to a continued shortage of qualified employees. Sectors from manufacturing to agriculture bore the brunt of the downturn. On top of that, the specter of a recession continues to hover as the nation prepares to enter its most contentious presidential election in memory. Throw in the impeachment of President Donald Trump and the potential threat of war with Iran, and economic angst for the new year continues to grow.
How will the national economy and suburban business fare in 2020? We talked to three local experts -- Gus Faucher, chief economist for PNC Bank in Chicago; Jeffrey Korzenik, chief investment strategist at Fifth/Third Bank in Chicago; and Steve Clingen, senior vice president, C & I Group Head, at Republic Bank in Oak Brook -- to get their take for the upcoming year.
There has been a lot of talk about a recession occurring this year. Do you believe we are heading into a recession?
- The U.S. economy will not enter recession in 2020. The big reason why is that consumers are in excellent shape. With solid job gains, an unemployment rate of 3.5% as of December (the lowest it has been in 50 years), and good wage growth, households have more money to spend. Since consumer spending makes up about two-thirds of the US economy, as long as households continue to buy more, the current expansion (already the longest in US history) will continue.
Other positives for consumer spending heading into 2020 include low inflation; rising household wealth thanks to increasing home values and a booming stock market; a high savings rate; very low interest rates; and low debt relative to household income.
Economic growth will be somewhat slower in 2020 than in 2019, however. Drags on growth this year will include business uncertainty given trade tensions between the US and China, and our other major trading partners; slower global economic growth; a tight job market that makes it more difficult for businesses to hire; and the waning positive impact of the corporate and personal income tax cuts that took effect in 2018.
-- Gus Faucher, chief economist for PNC Bank in Chicago
- We strongly believe the U.S. expansion will continue through 2020. Global risks are receding as China has stabilized its growth and Europe will soon find more stable footing. Central bankers around the world are largely biased toward monetary easing or neutral, and there are not yet the inflationary pressures that would force central banks to raise rates. Europe and Japan are also starting to look to fiscal policy (government deficit spending) as another tool to support their economies.
That being said, it is important for investors and business owners to recognize we are late in the economic cycle. The labor force is essentially at "full employment," which will constrain the pace of growth in the United States to less than 2% for the year. Capital investment, which could make that limited workforce go farther, is being held back by the uncertainties of an election year and trade disputes. Ultimately, these conditions plant the seeds for the next recession, but we simply have more time and room to grow before we get there.
We anticipate that 2020 will be a transition year. Businesses and investors can prosper, but the stresses and strains of a late cycle economy, e.g. a modest pickup in inflation, pressure on profit margins, slowing growth and credit constrains will all be visible by the end of next year.
-- Jeffrey Korzenik, Chief Investment Strategist, Fifth/Third Bank in Chicago
- The economy remains healthy, despite predictions of a recession for more than a year. Respondents have grown weary of talk of an impending recession and prefer to focus on their customers and staying ahead of the competition. A few of the business owners indicated 2018 and 2019 were among the best years in their company's history. And even if the economy cools down, they feel it does not mean a recession is imminent; a cooling down period is actually common. They remain optimistic going into 2020.
-- Steve Clingen, senior vice president, C & I Group Head, Republic Bank in Oak Brook
How do you see the presidential election and other global events -- like the escalation of tensions between the U.S. and Iran -- affecting the economy in 2020?
- The Dow Jones industrial average (DJIA) and the S&P 500 have both been known to generate returns that are below average in presidential election years. For example, according to data from Yahoo Finance, the DJIA grew 46% during President George H.W. Bush's entire term but only grew 2.5% in 1992, the year that he lost the election to Bill Clinton. President Bush was famously critical of the Fed raising rates during the election year.
Respondents we spoke with were quite aware that the Fed prefers to not influence an election with rate adjustments. Most business owners chose not to comment on politics, only to say conditions during the 2020 election year will bring unwelcome uncertainty to the markets, taxes and related planning for their businesses.
The business owners we spoke with are certainly keeping an eye on what's going on in the Middle East, like the rest of the world, but simply view it as another unwelcome distraction, contributing to uncertainty in the marketplace, which no one likes. As everyone knows, it has led to increased oil prices, at a time when the economy is slowing a bit (stagflation). They reminded me that, as always, they prefer to focus on their customers, employees, and key suppliers -- and always mindful of current and forecasted economic conditions.
-- Steve Clingen
- Elections generally do not have much impact on U.S. economic growth, and I do not expect that to change in 2020. What matters much more for the economy are the economic fundamentals. In the near term, these fundamentals include the state of the labor market, the global economy, and corporate profitability. In the long run, they are primarily demographic, in particular, the number of people in the labor force. Those short-term and long-term fundamentals do not change much from one election to another.
In addition, the nature of the US government makes it difficult to implement big changes that would have a large impact on economic growth. After the 2020 election, Democrats are likely to maintain control of the House of Representatives, while Republicans will likely still run the Senate, no matter who wins the presidency. This divided control will prevent any big policy swings that would have a substantial impact on economic growth.
Where the election might have more of an effect is the stock market. Plans to raise or lower corporate income tax cuts might influence the overall stock market, while some specific industries might benefit more (or less) depending on which party holds the White House.
-- Gus Faucher
Despite slowdowns in some sectors, unemployment remains at low levels and employers are struggling to find enough qualified workers. Will this continue in 2020?
- The demand for workers in the United States will persist as the economy will continue to grow in 2020. We stress that the labor shortage is structural, not cyclical. While the next recession will obviously loosen the labor markets, this relief will be temporary. In fact, employers today have had the benefit of the entrance of the large millennial generation into the workforce. Millennial birthrates peaked in 1990, and those young adults are largely already employed. If we are now hiring college graduates who were born in 1995, for example, the birthrate that year was already 20% below the millennial peak. Looking to the future, birthrates today (our workforce a generation into the future) are roughly 40% below those of 1990.
Of course, changes in immigration policy could alleviate some of these pressures. Even this may be an incomplete solution; fertility rates (a longer-term view than a single period's birthrate) are declining globally. The worker challenge is an international challenge.
We see business increasingly exploring nontraditional labor pools: attracting or retaining older workers, facilitating the return of parents who left to raise families, hiring people with disabilities and those marginalized or underemployed due to criminal records. Nontraditional talent acquisition and development will be the skill that determines the success of business leaders in the decades ahead.
-- Jeffrey Korzenik
- With unemployment is at its lowest point since 1969, business owners continue to find it difficult to fill positions at all levels at all types of business: manufacturing, service, or distribution. So, labor costs have naturally risen, squeezing margins. It is a constant battle to find good employees and keep them, an observation made by every business owner we spoke with. Owners also expressed frustration with younger, less experienced employees who seem to expect things to happen much faster than is realistic. And these same employees routinely change jobs, should they feel things are not happening as quickly as they had hoped, or are dissatisfied with some aspect of their job, however minor.
-- Steve Clingen
- The unemployment rate was 3.5% in December, the lowest it has been since 1969. Other measures also show very little slack in the labor market. The job market will remain very tight this year, although job growth will slow somewhat. Some of that slowing will come from somewhat softer economic growth, but more of it will come from an inability to hire given the shortage of available workers. Job growth, which has averaged around 175,000 per month over the past year, will slow to closer to 100,000 per month in the second half of 2020. However, this is still close to the pace at which new people are entering into the labor force, so the tight job market, and difficulties in finding skilled labor, will persist.
The good news is that this means that businesses will continue to raise pay throughout 2020, boosting employees' paychecks. With workers scarce and businesses competing to hire, wage growth has been well above inflation in recent years, giving households greater purchasing power. However, higher wages will put pressure on business profits.
-- Gus Faucher
Closer to home, Illinois' pension and budget issues are still affecting the business climate, as well as its ability to draw new business to the state. Do you see any improvement in the coming year?
- Illinois' pension problems will persist, weighing on economic growth. The state's unfunded pension liabilities continue to grow, with expected benefit costs much higher than expected revenues. There is no quick fix, as the state's constitution makes it extremely difficult to reduce promised benefits, with no change on the horizon. Given that there is no easy solution, much of the burden will fall on Illinois taxpayers, making it more difficult for the state to attract companies and workers.
-- Gus Faucher
What are one or two things business owners can do to prepare themselves for any headwinds expected in the new year?
- With ongoing trade negotiations between the U.S. and China, the potential for new tariffs on imported goods, the extremely tight job market, unrest in the Middle East, and the 2020 election, uncertainty is the greatest near-term threat to the current U.S. economic expansion. Businesses dependent on imports should reevaluate their supply chains and develop contingency plans in case of interruptions or new tariffs. Low interest rates are an opportunity for business owners to refinance debt and reduce interest costs. Low interest rates also offer firms an opportunity to make investments that would make their existing workforces more productive, allowing them to increase output without hiring new workers. Nearly one-half of the respondents to PNC's survey of small and middle-market business owners said that it was more difficult to find qualified workers in the fall of 2019 than it was six months to one year earlier.
-- Gus Faucher
- Given our belief in the structural nature of the labor shortage, businesses should assess their talent strategy. Will employers reduce staff in a downturn if it risks not being able to fill jobs in the expansion that will follow? What roles can be replaced or augmented by technology? What new talent pipelines are appropriate? In particular, we believe that the single biggest underutilized pool of workers are those with a criminal record (in particular, the 19 million with a felony conviction), and businesses should explore whether this is a viable hiring option for them.
It is late enough in the economic cycle that many businesses are already preparing for the downturn. Our analysis suggests that the eventual recession is likely to be modest by historical standards, so businesses should also prepare for the upturn with growth plans that might include acquisitions, geographic expansion or new products and services. Those businesses preparing not just for a downturn, but also for the next upturn, will have a significant advantage over competitors.
-- Jeffrey Korzenik
- What can business owners do to prepare for any headwinds expected in the new year? According to the ones we spoke with, the answer was pretty simple ... stay focused on their customers, employees and key suppliers, the same thing they do every year. Business owners are generally optimistic about everything, but they did acknowledge the 2020 election and its possible impact on the economy would be an unwelcome distraction. And as a result, perhaps they would put expansion plans, such as adding a location or a significant piece of equipment, would be put on hold, or scaled back.
-- Steve Clingen