Savannah Chamber

16 10 In addition to lowering policy interest rates, the Federal Reserve has stopped reducing its balance sheet – unwinding quantitative easing. In 2020, the Federal Reserve may begin to expand the size of its balance sheet, especially if a recession develops. Crude Oil Markets Absent significant supply interruptions or additional price premiums due to increased political tensions it is likely that oil prices will be lower in 2020 than in 2019. The global economic slowdown is the main factor that will keep oil prices low. Because oil markets are so volatile, a significant supply interruption would cause oil to trade significantly higher. There is no shortage of potential negative supply shocks. The September attacks on Saudi Arabia's Kurais oilfield and Abaquaiq processing facility illustrates the geopolitical risks to global oil supplies. The attacks increase the risk of a Saudi-Iran war, which would likely involve the U.S. and almost certainly would push oil prices to over $100 per barrel. The disruption in global oil supplies was the largest in modern times. This forecast assumes a major deceleration in the pace of global economic growth and no major disruptions in the supply of crude or refined products. The major downside risk for the oil price outlook is global recession, but if there is a major de-escalation of the trade war and the recession fears dissipate, oil prices will rise. Productivity In this economic cycle, a major barrier to faster U.S. GDP growth is below-average productivity growth, and that will continue to be the case in 2020. That is unfortunate because productivity growth raises wages and living standards. In 2020, the pace of productivity growth will decrease, but probably will not turn negative unless the economy lapses into recession. Since the Great Recession ended, there has not been very much capital deepening, adding more capital per worker. The trade war and recession fears will exacerbate this trend. Uncertainty will cause many businesses to postpone spending for investment. Nonetheless, a still-tight labor market will encourage some businesses to invest more in labor saving equipment and processes. The relative scarcity of workers also will encourage employers to use their workers much more efficiently, which boosts productivity. We are likely to see less federal government regulation, which will boost productivity growth. Removing regulations that benefit specific groups by protecting them from competition would be especially beneficial to productivity growth and the overall economy. In addition, policies that support investment spending in both the public (e.g., infrastructure) sector should boost productivity growth. Unfortunately, many of the long-term factors behind weak productivity growth will not lessen and may intensify. For example, slower gains in educational achievement contribute significantly to sub-par productivity growth. We are simply not adding enough to human capital to generate average, or above average, productivity growth. Since the Great Recession, many state and local governments reduced inflation-adjusted spending per student for both K-12 and higher education. Less public support for the nation's research universities erodes our comparative advantage in innovation. Moreover, public spending priorities appear to be moving towards providing more support to the retired rather than to educational institutions and students. Access to higher education therefore will continue to be more expensive. Access for recent generations is more restrictive than it was for the baby boomer generation. Another effect of less public support for higher education is that the U.S. innovation ecosystem will suffer. The aging of the population also limits productivity growth. In general, a less liberal immigration policy limits productivity growth, but not if more visas are given to those with the most skills. Tariffs and trade tensions limit productivity growth and may cause productivity to decline substantially. Productivity growth and in turn living standards will rise if the nation's policymakers focus more on improving the innovation ecosystem and focus less on reducing the trade deficit or on restricting the immigration of talented working-age people. Forecast Risks The timing of the U.S.-China trade war is very bad. The U.S. economy is operating at the late stage of the economic cycle, which makes it vulnerable to trade shocks and policy mistakes. Of course, the length of an expansion does not itself imply that a recession is likely. After all, Australia has avoided a recession for over 25 years. Nonetheless, over the course of a long expansion excesses tend to develop in both the financial and labor markets, which makes the overall economy more vulnerable to the unexpected shock or major policy blunder than is true earlier in the economic expansion. In addition, federal tax reform provided a modest late cycle fiscal stimulus in 2018-19, which will have run its course by 2020. The large and growing federal budget deficit as well as the national debt will limit the federal government's ability to use fiscal policy to counter recessionary forces should they bear down on the U.S. economy, but these imbalances are

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