Eight Paths for the Economy in 2020

COMMENTARY Markets and Finance

Eight Paths for the Economy in 2020

Jan 6th, 2020 2 min read
COMMENTARY BY
Stephen Moore

On Temporary Leave of Absence |Distinguished Visiting Fellow

On Temporary Leave | Stephen Moore is the Distinguished Visiting Fellow for Project for Economic Growth at The Heritage Foundation.
2019 is going to be a hard year to beat. Busà Photography/Getty Images

Key Takeaways

Booms like this don’t happen by accident.

Trump's tax cuts are working. The tax cuts have been a spectacular success in terms of generating jobs, wage hikes, profits, and GDP growth.

If housing values fall, defaults will soar, as they did in 2008 and 2009. Amazingly, the government has learned none of the lessons from the last housing meltdown.

Let’s face it: 2019 is going to be a hard year to beat. Stocks and 401(k) plans up more than 25% on average, wage gains of 3% to 5%, 7 million surplus jobs, and the lowest unemployment and inflation rates in nearly 50 years. That's a lot to celebrate.

Booms like this don’t happen by accident. The imperative is for Republicans to connect the dots between this banner year for the middle class and the tax cuts, deregulation policies, and pro-America energy production initiatives.

So will 2020 continue the winning streak? The only thing that we know for sure is that economists don’t know for sure. I’ll include myself in that category. The best I can do is provide reasons for optimism and reasons for pessimism.

The case for optimism:

1. America has scored two big wins on the trade front. The biggest risk since Trump entered office was a freeze-up of the global trading system because of his tariffs. Now, with the concluding of the trade deal with Canada and Mexico and a very positive outlook for a trade win in the tariff wars against China, investors are bullish. The China deal takes an escalation of tariffs off the table for 2020.

2. The Federal Reserve is finally getting it right. A year ago, the Fed torpedoed the economy, and the stock market fell by 2,500 points while GDP growth and investment stalled out. Now rates are lower, there is more dollar liquidity, and we have price stability with very little risk of inflation.

3. Trump's tax cuts are working. The tax cuts have been a spectacular success in terms of generating jobs, wage hikes, profits, and GDP growth. The chances of those tax cuts going away in 2020 are close to zero. If anything, we might see another small tax cut. In sum, the policy goals are turned toward growth.

4. Washington will be paralyzed with partisan gridlock in 2020. Good. When things are going well, less is more.

So what could go wrong? Here are four things to worry about.

1. China trade deal blows up. Beijing could back out (they've done it before), or they could start cheating. If either happens, Trump hammers them with more tariffs, and we are back in a trade war.

2. Elizabeth Warren, Bernie Sanders, Joe Biden, oh my! If markets start anticipating that any of these anti-growth candidates will win, stocks will tumble. If Trump loses, then we are talking "Green New Deal," "Medicare for all," capital gains taxes, wealth taxes, and the end of the Trump tax cuts. To say this would be harmful to growth and stocks is a vast understatement. And if Trump loses to one of these candidates, the market could collapse.

3. The global economy stays flat. It's been stalled out for the last year or two, and if it doesn't get a boost in Europe and elsewhere, it's going to affect U.S. growth negatively. We can't keep carrying the world economy on our shoulders.

4. Housing bubble bursts again. Don't look now, but Fannie Mae and Freddie Mac are up to their old tricks, providing near-100% loan guarantees on 2-3% down-payment loans. If housing values fall, defaults will soar, as they did in 2008 and 2009. Amazingly, the government has learned none of the lessons from the last housing meltdown.

On balance, I'm with the bulls for 2020. Just don't expect 25% gains again this year.

This piece originally appeared in The Washington Examiner