Expectations for the Economy in 2020
The U.S. stock market closed last week very close to all-time highs. The news of the “Phase One” trade deal with China moved the market back and forth like a pendulum, but the week concluded with the hope of a deal coming together.
Last Friday, for the “Behind the Markets” podcast, Professor Jeremy Siegel and I interviewed Patrick Harker, president and CEO of the Federal Reserve Bank of Philadelphia, about how he views the economy and monetary policy. Harker will be a voting member of the Federal Open Market Committee (FOMC) next year.
- Harker expects GDP growth to come back to trend levels of just above 2% this year and stabilize at 2% for 2020. As we return to trend levels, he expects job growth to continue at 100,000 jobs a month, a level that we are still above today despite being late in the economic cycle.
- The Federal Reserve (Fed) expected the labor force participation rate would trend down, bringing more pressure on wages, but this measure recently moved up to a seven-year high, with employees coming off the sidelines and back into the workforce.
- Generally, Harker sees the economy in a good position that will continue to grow at trend levels, which should allay concerns of recession.
When asked if he was properly characterized as a hawk, Harker noted he was neither a dove nor a hawk but rather an eagle for his hometown team.
- Harker noted he did not support the Fed’s December 2018 interest rate hike. Rather, he thought rates were in a neutral policy stance before the hike, and he thus supported the first rate cut in 2019. Harker does not think the next two cuts were warranted.
- Harker sees uncertainty in business investment hampering the current environment, but he does not believe interest rates, and specifically lowering the cost of capital, would address or mitigate these other often trade-related uncertainties.
Should the Fed Start a Permanent Repurchase Facility?
- Harker believes some spikes in repurchase (repo) rates are natural, but the Fed does not want excessive spikes (as we saw in September). Harker wants the Fed to help offset volatility in the repo market, but he does not want the Fed to explicitly take over a private market function.
- Harker’s diagnosis of the problem: 80% of $1.5 trillion of financial market reserves are held by five financial institutions, and when those institutions don’t trade, there can be spikes in the rates due to a shortage in available funds. Harker believes some regulatory friction caused the recent spikes.
- Harker believes there’s zero evidence the high repo rates are signs of problems at one of the large banks.
Will Technology Automation Eliminate Jobs?
- Harker believes what is different about this wave of innovation is the pace of change.
- Harker has studied his district closely and believes one-fifth of all jobs have a high risk of being automated away. Harker pointed to fully automated fast-food restaurants as an example, where everything is done robotically.
The limiting growth factor, he contends, for the U.S. economy is a lack of skilled labor.
- Harker sees a lot of creativity in companies trying to train workers and bring new workers off the sidelines given the tightness in the labor markets.
- Harker also believes apprenticeship programs are something that can help people both earn and learn at the same time, and they are a model the U.S. needs to explore in much greater force than it does today.
Harker said there is a new space race in quantum computing, and these machines are going to dominate the world economy. Harker believes these machines will be developed to solve real problems, including data encryption, over the next decade.
While artificial intelligence and machine learning is important, Harker claims that the quantum computing revolution is significantly more important.
The U.S., historically, has not been the lowest-cost producer of anything, but our comparative advantage has been as the low-cost innovator.
This was a great conversation with Professor Siegel and Harker; please listen to the full conversation below.
Jeremy Schwartz has served as our Global Chief Investment Officer since November 2021 and leads WisdomTree’s investment strategy team in the construction of WisdomTree’s equity Indexes, quantitative active strategies and multi-asset Model Portfolios. Jeremy joined WisdomTree in May 2005 as a Senior Analyst, adding Deputy Director of Research to his responsibilities in February 2007. He served as Director of Research from October 2008 to October 2018 and as Global Head of Research from November 2018 to November 2021. Before joining WisdomTree, he was a head research assistant for Professor Jeremy Siegel and, in 2022, became his co-author on the sixth edition of the book Stocks for the Long Run. Jeremy is also co-author of the Financial Analysts Journal paper “What Happened to the Original Stocks in the S&P 500?” He received his B.S. in economics from The Wharton School of the University of Pennsylvania and hosts the Wharton Business Radio program Behind the Markets on SiriusXM 132. Jeremy is a member of the CFA Society of Philadelphia.