2020 Economic Forecast

Thursday, January 23, 2020
Spencer Cohen

Spencer Cohen

Senior Economist
Community Attributes

Seattle heard the CEOtoCEO Economic Forecast for 2020 from Spencer Cohen, PhD, the Senior Economist for Community Attributes. Dr. Cohen's presentation provided a view into the economy of the Puget Sound area in addition to the greater Pacific Northwest region.

Dr. Cohen began his presentation with an overview of the economy in recent years, accompanied by the general consensus for expectations into 2020. Growth in the Gross Domestic Product (GDP) of the world was 3% in 2019, with growth being largely driven by China's rapid economic expansion. Although China's GDP growth rate had been consistently above 8% since 2000, beginning in 2012 the aging population and demand for higher wages among the workforce has caused this rate to decline. China's real GDP is expected to flatten to 5.5% in the next five years. The global GDP is expected to continue to grow at a rate of 3%, or as high as 3.6%, due to expanding economies throughout the world. The US is expected to see a reduction in real GDP growth: from 2.9% in 2019 to 2.1% in 2020, and flattening to 1.6% in the following 2 - 3 years.

Growth in total global trade declined from 3.6% in 2018 to 1.1% in 2019. It is expected to rise to about 3% by 2021 and reach 3.8% the next year. Some of the current decline can be attributed to the increase in the trade-weighted US dollar index, which reflects the increase of the value of the US dollar relative to other currencies. An increase in the value of the US dollar effectively makes US goods more expensive to purchasers in other countries, and as the US is a major seller on the global market, this creates a strong inverse correlation between global trade growth and the US dollar index.

Dr. Cohen advised that quantitative easing begun at the end of 2019 by the Federal Reserve is not expected to continue, but that interest rates should remain at their current level for the majority of 2020. The decline in international trade makes cutting interest rates less likely to increase inflation, but the expected recovery in global trade may make it necessary to raise rates to maintain an inflation target of 2%.

Recessions historically occur every 10 years, and the last one occurred more than 10 years ago, Dr. Cohen explained that the United States is not in danger of another in the near future due to the severity of the last one. In a sense, the period of economic expansion we are currently in is still a "recovery" from that recession. The US has had 126 months of consecutive employment growth, which is the longest on record. Such long periods of expansion are seen as a sign of approaching recession, but the expected recovery of global trade will make continued growth more likely, probably at a lower rate. A short period of an inverted yield curve (interest rates for short-term loans are higher than rates for long term loans), which is normally a predictor of a pending recession, caused some fears before the inverted curve reverted to a normal yield curve.

Washington State continues to outperform the US averages for economic growth and population growth by nearly double. The continued in-migration to Washington State will provide some protection from any slow-downs in the US. Consistent in-migration to the state can be an insulator from recession, as those who can't afford the high home prices near some of the major population centers migrate to the outlying areas and create demand for new construction and businesses to serve them.

Employment growth for Washington in 2019 was 2.8%. The new jobs included 4,600 in software publishing, 4,400 in aerospace (reversing a trend of losses in this sector in previous years), and 4,000 retail jobs. The census report which produced these figures classified Amazon employees, as well as employees of companies that sell products on Amazon as "retail" employees, so the figure of 4,000 retail jobs is somewhat skewed. Washington State's job growth will decrease slightly to 2.3% in 2020, and the state is expected to get 60,000 new jobs in the tech sector, and 50,000 new jobs in transportation.

The Seattle-Bellevue-Everett area is projected to add 40,000 new jobs, with the largest job sector, Computer- and Mathematics-based work, adding 30,000 new jobs by 2023. The second largest addition of jobs is projected in the food service sector, which will add 19,000 jobs by 2023. The availability of jobs is a major attractor of new residents, and the Central Puget Sound region continues to attract new residents with the creation of new jobs.

Trade is another major consideration for the Washington economy, as Washington is a leader in global trade. Exports represent an eighth of the state economy. Exports from Washington were down 28.8% in 2019, largely due to a lack of aerospace exports. Aerospace represents nearly half of Washington's export revenue, and China is the largest prospective customer. China has not bought a Boeing plane in two years, but China's growth in air travel could bring new orders in 2020.

Washington's exports brought in $55 billion in 2019. Dr. Cohen highlighted the top export markets for the state and their export purchases in 2019:

  1. Canada - $7.8 billion
  2. Japan - $5.9 billion
  3. China - $4.4 billion
  4. South Korea - $2.3 billion
  5. Mexico - $2.2 billion

Growth for each is declining slightly, but China's is the strongest at about 6%, which is expected to hold through 2022. The sixth through fifteenth countries on this list purchase less than $2 billion of goods, with the fifteenth (Turkey) purchasing $0.9 billion in 2019.

The trade negotiations with China may or may not have significant impact on Washington economy. The Trump administration's investigations into unfair trade practices and compromises to US national security resulted in tariffs being imposed on over $34 billion dollars of Chinese goods. These tariffs are expected to be passed on to the consumer and result in an average cost of $800 - $1,000 to the average US household annually. While China responded with their own tariffs of up to 25%, the disparity in exports between the two countries means that Chinese tariffs on US goods don't carry the bargaining power that US tariffs on Chinese goods do. A Chinese moratorium on US soybeans was temporary, as the US is the main soybean producer. Companies can be hurt by temporary displacement in the Chinese market, as regaining market positions can be difficult after purchasers have developed new relationships with suppliers from other countries.

The Phase I trade deal signed on January 15 is an attempt to prevent a trade war. In it, China pledges to buy an additional $200 billion in US goods (above what was purchased in the reference year of 2017) over the next two years. China also pledges to buy 40 - 50 billion dollars' worth of agricultural products annually, compared to the $17.8 billion dollars of agricultural products purchased in 2017. This could have significant impact on Washington State, as it is a significant producer of agricultural products sold in Asia, and ports in the Pacific Northwest are a large employer in the state.

The prospects for Washington State, and especially King and Snohomish counties are promising, and significantly better than the general prospects for the country. Strong in-migration to Washington state will result in growth and development, as housing demand and housing prices continue to increase and development expands into more affordable areas. This continued development, along with the potential for an increase in exports to China, will ensure Washington's continued economic growth in 2020.

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