Can U.S. economic resilience last?

By Constance Hunter

The U.S. economy is resilient and begins the new decade with solid fundamentals; GDP grew at 2.3% in 2019. Global headwinds which threatened to blow the economy off course were met with a reversal of Fed policy from 3 rate hikes to 3 rate cuts in 2019. This caused a turnaround in the residential real estate sector, gave a boost to interest rate sensitive sectors such as manufacturing, and helped the equity market turn in gains of near 30%.

The current 3.5% unemployment rate represents a 50-year low. Steady employment and wage gains have buttressed the U.S. consumer, the backbone of the current expansion. The health of household consumption has allowed the U.S. to weather the many global headwinds that have knocked other major economies off course over the past decade. The question is, can this resilience last and spread to other areas of the economy?

The economy is exhibiting signs of a late-stage expansion. While this is a state that can go on for some time under the right conditions, the structure of the economy is shifting. Jobs growth which averaged 225,000 per month in 2018 slowed to 175,000 in 2019, and is expected to slow to 150,000 in 2020. This will equate to jobs growth of 1.2% but still will still likely result in solid consumption growth of 2.6% in 2020, the same pace as in the previous two years. Though we have concerns that corporate investment in property plant and equipment will deteriorate further, the consumer seems strong enough to provide a foundation for growth in 2020. A foundation that may even be strong enough to prevent recession in the face of global headwinds.

The main caveats to our outlook are derived from two primary shocks to growth. The suspension of the Boeing 737 Max production until June 2020 or later is a supply shock that will likely take 50 basis points from growth in each quarter during the first half the year. If the production suspension were to last for one quarter, our model suggests a near full rebound once production is resumed. However, a suspension of 6 months can begin to have more lasting effects. We anticipate that the bounce back in the second half of the year will be approximately 70% of the growth lost during first half of the year.

The second shock is a negative demand shock. The outbreak of the Covid-19 (coronavirus) in China has led to a stoppage of commerce resulting in a significant negative demand shock—China’s economy was in a near nation-wide shutdown for four weeks. We conservatively forecast that China’s GDP will grow at 4.5% in 2020 versus 6.1% in 2019. As such, it is unlikely that the U.S. would remain unscathed from this kind of shock. Therefore, we project GDP to slow to 1.6% in Q1 2020 from 2.1% in Q4 2019. For context, in mid-March 2011, when the Tohoku earthquake took out the Fukushima nuclear plant, the disruption to global supply chains was enough to knock many economies into negative GDP that quarter, the U.S. being one of them. Another consequence from the Covid-19 outbreak is the impact on the U.S.-China Phase 1 trade deal. The deal stipulates that China increase imports in 2020 by 58%, a hurdle that was likely going to be unmet even if all went perfectly. The outbreak of the virus and the corresponding policy response means China will invoke a clause in the agreement that addresses unforeseen disasters. This will likely allow China some breathing room this year, but it also means the uncertainty around U.S.-China trade will remain present and its dampening impact on investment is likely to continue as well.

Nevertheless, despite two significant headwinds to growth in the first half of the year, recession risks are lower today than they were at this time last year. This is due to the liquidity impact both domestically and globally from the Fed’s rate cuts. At KPMG, we view the probability of a recession in 2020 at 35% compared to our previous forecast of a 45% chance 11 months ago. Naturally, this is all subject to change given the developments of Covid-19.  

One notable domestic risk is the level of business sector debt which is nearly 75% of GDP. Fueled by low interest rates, more than 50% of investment-grade corporate debt outstanding is currently rated BBB, the lowest rung on the investment grade ladder. Over the next few years, several trillion dollars of U.S. corporate debt will come due, adding rollover risk to an outlook that already includes moderate recession risk. This will require businesses to keep a sharp eye on leverage and liquidity now, as well as protecting their balance sheet under stress scenarios. Should the twin shocks to the first half of the year’s growth be greater than anticipated, the level of debt in corporate America could amplify negative shocks.

While we would like to sound the all clear on the U.S. economic outlook, global growth concerns remain. The nascent recovery in Germany’s manufacturing economy could be thrown off course from the severe nature of the slowdown in China. As for China, the economy will likely endure a sharp slowdown in activity in the first half of 2020. The good news is, the Fed inoculated the U.S. economy from catching the global flu in 2019. Should the need arise, the Fed stands ready with a booster shot for 2020. 

To speak with Constance Hunter about what she expects from the economy, contact Matthew Weiss at

Constance L  Hunter

Constance L Hunter

Former Principal and Chief Economist, KPMG LLP

Media contact

Matt Weiss

Matt Weiss

Director, Industry Communications, KPMG US

+1 201-307-8138