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Here’s Why a US Downturn is More Likely to Hit in 2021

The U.S. economy should hold up for most of 2020, but after that it could get dicey heading into 2021.

Rumblings of a possible upcoming recession first surfaced last year, and now there’s a possibility that a slowdown could happen later this year. Ninety-seven percent of chief financial officers believe that a downturn–or some form of slowdown or recession–has already begun or will occur by the end of 2020. That’s up from 88 percent in the first quarter of 2019, according to the latest quarterly CFO survey from Deloitte. However, just 12 percent in the fourth quarter survey believe that a downturn has already commenced, and 14 percent say they already see signs of a downturn in their company’s operations.

When it comes to macroeconomic expectations for 2020, the CFOs surveyed point to falling expectations for consumer and business spending, and two-thirds say performance beyond 2020 will depend substantially on upcoming U.S. elections.

“Compared to early 2019, companies appear to be taking more defensive actions related to downturn expectations–particularly around reducing spending and limiting or reducing headcount. While CFOs expect some form of U.S. downturn by the end of 2020, the good news is that expectations of a full-blown recession have fall sharply since [first quarter 2019],” Sanford Cockrell III, national partner of Deloitte’s U.S. Chief Financial Officer Program, said.

The survey also indicates that companies remain more focused on revenue growth (46 percent) than cost cutting (33 percent). Year-over-year expectations for revenue growth fell to 3.7 percent from 4.3 percent, representing a three-year low. Capital spending growth inched up slightly to 3.7 percent from 3.6 percent, while hiring growth slid sharply to 1.1 percent from 1.6 percent, representing the second-lowest level in nearly six years.

On Friday, data from the U.S. labor department indicates the economy added a seasonally adjusted 145,000 jobs in December. At that number the unemployment rate remained at 3.5 percent, a 50-year low. However, the number was lower than the 160,000 economists were expecting and far lower than the 256,000 jobs added in November, although the latter figure has been partly attributed to General Motors workers returning to work following at 40-day strike. For 2019, the monthly average was 176,000 jobs, versus the monthly addition of 223,000 in 2018.

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The Conference Board believes that despite a gradual slowing of job growth, the labor market will continue to feel tight in 2020.

“Job creation was mainly concentrated in the services sector as well as in construction, while the decline of 12,000 jobs in manufacturing shows that this part of the economy is still weak. However, easing trade tensions between China and the U.S. may help to further improve business confidence in 2020,” Frank Steemers, The Conference Board’s associate economist, said.

He believes employment growth will “somewhat moderate” in 2020. There will be a further tightening of the labor market as the “working-age population is barely growing, and the labor force participation rates are only slowly increasing,” Steemers said.

That means blue-collar and manual services workers will have a harder time recruiting and retaining current employees, which could result in stronger wage acceleration. The average hourly earnings stagnated in 2019 at around 3.2 percent, and weakened this month to 2.9 percent. “Slower wage growth for highly educated management and professional workers has held back average wage growth for all workers,” the economist said.

The December reading of The Conference Board’s Consumer Confidence Index suggests that consumer spending isn’t likely to gain much momentum at this point in time.