Will the U.S. enter a recession?
Nancy R. Lazar is head of economic research and founding partner at Cornerstone Macro, which provides economic research to institutional clients. She was a keynote speaker at Thornburg’s Global Research Summit in March where she presented her global economic outlook amid the impact of the coronavirus. Afterwards, Lazar summarized her 2020 U.S economic forecast in a quick one-on-one Q&A.
Thornburg: What is the present state of the U.S. economy, and do you foresee a U.S. recession in 2020, especially in light of the Coronavirus’s impact?
Nancy Lazar: For US. growth, and quite frankly, global growth, you’re actually seeing the lagged effects of the global stimulus that was put in place in 2019 and helped to re-accelerate U.S. and foreign economic activity, and manufacturing in particular. That will help support U.S. GDP growth in the first quarter, which could be about 2%.
Thornburg: So, if not in the first quarter, when will we see the impact of the coronavirus on U.S. growth?
Nancy Lazar: The real risk is for the second quarter. March will be a very weak month, so you’re going to enter the second quarter, potentially with a decline in a lot of activity, particularly consumer spending manufacturing activity. While falling mortgage rates may keep the housing sector relatively strong, weak consumer spending and capital spending may mean second-quarter GDP growth is around zero, with a possibility of a slight decline. But, I do not see two consecutive quarters of a decline, which is a technical recession. In fact, I believe we will have a V-shaped recovery in the back half of the year.
Thornburg: Capital spending may be weak in the second quarter, but you believe it’s been capital spending that has created a layer of armor around the U.S. economy, and that it’s capital spending, not consumer spending, that is the true heartbeat of the economy.
Nancy Lazar: While capital spending is only 14% of U.S. GDP, it’s not appreciated for driving the health of the economy. It’s actually the heartbeat of U.S. economic activity. Capital spending creates productivity, which protects and improves profit margins. Capital spending actually gives companies the wherewithal to hire more people. The simple analogy is Amazon versus Sears. One company stopped investing in its business and has destroyed its profitability because it had no productivity, so it can’t hire anybody. The other is just the opposite. A key part of the capital spending cycle has been technology. Spending on hardware, software, R&D—those parts of capital spending in the U.S. actually have been very robust. That capital spending strength has improved labor breadth by creating a broader footprint of jobs and lured people back into the labor force. Productivity improves the non-inflationary growth of this country and reduces the odds of a recession. Thus, it’s capital spending that has put armor around the U.S. economy by improving productivity and creating a healthier job market. As a result, the economy can take a blow but not go into a recession.