SAN DIEGO — The U.S. economy is likely to take a hit this year from the effects of geopolitical uncertainty and a global recession in the manufacturing sector, according to Michael Fratantoni, chief economist for the Mortgage Bankers Association (MBA).
His forecast calls for U.S. GDP growth of 1.2 percent in 2020, down from 2.2 percent in 2019, and for job growth to dip from a monthly average of 175,000 last year to 150,000 this year. The unemployment rate, which currently stands at 3.6 percent and is near a 50-year low, is expected to reach 3.9 percent by year’s end.
The wave of tumultuous events on the world stage have come fast and furious, the veteran economist observed. “Just recently you had the situation with the assassination of [Iran’s General Qassem Soleimani] and ballistic missiles being fired across the Middle East. Now we have got the coronavirus. We just concluded an impeachment trial. We have a presidential election. The trade wars of 2018 and 2019 are perhaps simmering down a little bit, but still a concern and still impacting a lot of decisions by private actors out there.”
Such conflicts pose a threat to what has been a “remarkable” run for the U.S. economy, according to Fratantoni. In January, the current economic expansion reached 127 months — more than a decade long.
“Economists are fond of saying expansions don’t die of old age, but we are certainly at a place now where people are getting a little bit nervous,” said the veteran economist, whose remarks came Sunday afternoon during a presentation at MBA’s 2020 Commercial Real Estate Finance/Multifamily Housing Convention and Expo.
A few hundred mortgage bankers, direct lenders and other commercial real estate professionals gathered in a ballroom at the Manchester Grand Hyatt in San Diego to hear Fratantoni’s economic predictions for 2020. Joining him on stage was Jamie Woodwell, MBA’s vice president of commercial/multifamily research, who provided an overview of the commercial real estate financing landscape. The special session helped kick off the conference, which ends Wednesday. The number of registrants for the conference is approximately 3,000, according to MBA, similar to last year’s event.
Indicators to watch
The manufacturing sector lost 12,000 nonfarm payroll jobs in January and has shown little movement over the past year, according to Bureau of Labor Statistics.
Meanwhile, the Institute for Supply Management’s purchasing managers’ index fell to 47.2 in December 2019 from 48.1, the fifth straight month of contraction. According to Investors Business Daily, it was the worst reading since June 2009 and marked the eighth decline in the last nine months as factories continue to dial back production. (Readings below 50 indicate activity is shrinking.)
Job openings are down considerably from what they were just a few months ago, according to Fratantoni. The Labor Department reports that job openings fell 561,000 to 6.8 million in November 2019 based on its monthly Job Openings and Labor Turnover Survey. That was the biggest drop since August 2015 and pushed job openings to their lowest level since March 2018, according to a Reuters report.
Source: MBA Forecast (Click above to view a larger version)
“Employers are a little bit hesitant to continue to expand given this environment,” said Fratantoni. Measures like overtime hours and wage growth are also showing signs of leveling out, he added.
In a recent Deloitte survey of chief financial officers at big U.S companies, almost all respondents said they anticipated the economy will slow this year, and 77 percent indicated that the stock market averages were overvalued.
The good news for borrowers is that interest rates are expected to remain low and in a tight range overall, despite occasionally experiencing some volatile swings. Fratantoni is forecasting the 10-year Treasury yield, which stood at 1.8 percent at the end of 2019, to climb 10 basis points to 1.9 percent by the end of 2020.
Major wild card
The economic impact of the coronavirus, the public health emergency originating from China that has resulted in the deaths of more than 900 people worldwide, is uncertain, said Fratantoni. The best estimates are that the virus will take two percentage points off annual China’s GDP growth in 2020. China reports that its economy grew by 6.1 percent in 2019.
“That’s what happens when you essentially close down for a month large portions of a very large country. From a global perspective, it’s much, much tougher to get a handle on what the effect is going to be.”
Source: Oxford Economics, NBER (Click above to view a larger version)
From a public health standpoint, the fatality rate stemming from the SARS (severe acute respiratory syndrome) outbreak in China in 2002-2003 was higher, according to Fratantoni. However, during that period China accounted for 4 percent of the global economy compared with 16 percent today.
The impact on China is going to have ripple effects on supply chains, tourism and even the financial markets, said Fratantoni.
“This forecast that I’m showing here was really done in advance of the news we have around the coronavirus.”
— Matt Valley