U.S. outlook for 2020.

• Author: Witte, Willard E.

A year ago, we expected that 2019 would represent a step up from the 2.5 percent growth achieved in 2018 with growth approaching 3 percent. But we also warned that the risks were mostly to the downside. This was not a great forecast, but also not too bad.

We expect now that 2019 will end up with output growth a little below that of 2018 (see Figure 1). In our outlook a year ago, we recognized that domestic political dysfunction and international trade friction posed threats to our forecast, and unfortunately this has proven to be the case. The resulting disruption of supply chains and deterioration in business confidence has produced a significant slowing in the growth of investment. Other deviations from our forecast essentially balance out: Consumption has been close to our expectation; housing was a little below forecast but was offset by stronger government spending; improvement in the trade deficit was offset by less inventory accumulation.

The labor market is headed for a pretty good year, but not as good as we expected. A year ago, we predicted that the economy would create jobs at a rate close to 200,000 per month and that the unemployment rate would fall a little. The latter has been the case, but job creation has averaged just 167,000 (through October), as seen in Figure 2. As we expected, the labor force participation rate (the proportion of the working-age population that is active in the labor market) has risen slightly.

Overall, the performance of the economy during 2019, while positive, has been below both 2018 and our expectations. This raises concerns for the year ahead.

Looking to that future, we are forecasting another year of weakening growth for the economy--and we do so with some quivers of dread. A few specifics:

* We expect output growth in 2020 to average a little below 2 percent. However, by this time next year, quarterly growth could be struggling to remain above the 2 percent level.

* Employment will continue the trends seen in 2019--growth will remain positive, but the rate of growth will fall. Job creation will average well below 150,000 for all of 2020, and could be at or below 100,000 by the end of the year.

* The labor market will remain tight. The unemployment rate could decline a little, but it is already at a five-decade low. Demographic pressures could produce some erosion in the labor force participation rate. Firms unable to find workers will remain an important theme.

* Consumer spending will continue...