Goldman Sachs is optimistic about the US economy in 2020.
A team of the bank's economists, led by Jan Hatzius, released a note detailing their predictions for next year.
They expect the US-China trade war to subside and consumer spending to remain strong, offsetting weak business investment and causing growth to accelerate. They also predict unemployment will drop to its lowest level since the Korean War and see the risk of a recession dropping, from one in three earlier this year to one in five.
Markets are likely to remain nervy, however, with a presidential election in less than a year, as there's no clear frontrunner among the Democrats and President Donald Trump's approval ratings remain low.
Below are Goldman's expectations for the US economy in 2020.
Goldman expects growth to push upward in 2020 and cites four main reasons:
As a result of this, they expect a "modest acceleration" in growth in 2020 to between 2.25% and 2.5%.
Goldman's economists say "a year of above-trend growth should mean another year of solid job creation."
They expect nonfarm payroll growth to stay above the 100,000 breakeven point and the unemployment rate to continue to trend downward. The bank is forecasting unemployment to hit 3.25% by the end of 2020, which it says would be the lowest rate since the Korean War.
Wage growth should also rise by about 3.5%, as shown in the graph above, with those on lower incomes set to gain the most.
After delivering three interest-rate cuts this year, the Federal Reserve seemed to indicate that it "would need to see a really significant move up in inflation that's persistent before we even consider raising rates to address inflation concerns." As a result of this, the bank expects fund rates to remain unchanged in 2020
Earlier this year, the bank's economists put the risk of a US recession within the next 12 months at one in three. Now it's cut the chances to one in five.
"The current expansion is now the longest in US business cycle records dating to the 1850s, and some recession fears may simply reflect an instinctive sense that its time is nearly up," the economists said."This has not been an unreasonable thought historically, as the two usual late-cycle risks-inflationary overheating and financial imbalances-often did grow over time. But so far both risks look limited," they added.
Goldman says next year's elections are "likely to be the single biggest event for financial markets in 2020." The bank will be keeping a very keen eye on what happens in the next year.
Goldman anticipates a tight race. It notes that while the incumbent usually stays in office, President Donald Trump is battling low approval ratings.
There could be changes for the Senate, too, according to the bank: "Prediction markets currently imply a 36% probability of a Democratic majority in the Senate. In light of the fact that outcomes of competitive Senate seats and presidential elections are correlated, this is probably also close to the implied probability of unified Democratic control."
If one of the four frontrunners for the Democratic nomination does win the general election (Bernie Sanders, Joe Biden, Pete Buttigieg, and Elizabeth Warren), Goldman thinks the federal corporate income tax rate would most likely be upped from 21% back toward 35%. Goldman says it would "reduce S&P 500 earnings in 2021 by 11%" if it were to go all the way back to 35%.
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