Goldman Sachs is optimistic about the US economy in 2020.The Wall Street titan’s economists expect growth to accelerate next year, after suffering from the trade war in recent months.They predict unemployment will drop to its lowest levels since the Korean War, and they put the risk of a recession at one-in-five.Goldman identified the looming presidential election as the single biggest risk to the US economy next yearView Business Insider’s homepage for more stories. Goldman Sachs is optimistic about the US economy in 2020. A team of the bank’s economists, led by Jan Hatzius, released a note detailing their predictions for next year. They expect growth to accelerate next year as the trade war subsides and consumer spending remains strong, offsetting weak business investment. They also predict unemployment will drop to its lowest levels since the Korean War, and see the risk of a recession dropping, from one-in-three earlier this year to one-in-five. However, markets will remain nervy with a presidential election in less than a year, as there’s no clear frontrunner among the Democrats, and Trump’s approval ratings remain low. Below are Goldman’s expectations for the US economy in 2020.

Growth is set to modestly accelerateGoldman Sachs Goldman expects growth to push upwards in 2020 due to four main reasons:The bank expects “the drag from the trade war to fade gradually.” What this means is that the bank’s economists expect the “phase one” deal to be signed by the end of the year and that the December 15 tariffs will be removed. Recently Goldman Sachs released a note on how the trade war dragged growth down by about 0.3% to 0.4%, which hit real incomes and tightened financial conditions. But by the end of 2020, Goldman expects this drag to disappear. “Driven by both the better trade news and easier monetary policy, the sharp tightening in financial conditions in late 2018 has now fully reversed,” the bank said. According to the economists’ research, this is already showing in housing data. Consumer spending is also expected to outlast weak business investment. “Healthy consumer confidence and solid gains in disposable income growth and household wealth should keep consumption growing at a roughly 2.5% pace next year. Meanwhile, some of the recent weakness in business investment – especially in the energy and aircraft categories – is likely to prove temporary.” “The drag on goods-sector output from the inventory adjustment is probably nearing an end,” Goldman’s economists said. They added that since the first quarter of 2019, “inventory investment as a share of real GDP hit its highest level since mid-2015, the monthly numbers have slowed steadily and the inventory components of both the ISM and the Markit PMI have fallen below 50.” As a result of this, they expect a “modest acceleration” in growth in 2020 to between 2.25% and 2.5%.

Another solid year of job creation aheadGoldman Sachs Goldman’s economists say that “a year of above-trend growth should mean another year of solid job creation.” They expect nonfarm-payroll growth to stay above the 100,000 break-even point and the unemployment rate to continue to trend downwards. The bank is forecasting unemployment to hit 3.25% by the end of 2020, which it says is the lowest rate since the Korean War. Wage growth should also rise by about 3.5% as shown in the graph above, with those on lower incomes set to gain the most.

The Fed has set a high bar for changing interest ratesCarolyn Kaster/AP After delivering three rate cuts this year, the Fed seemed to indicate that it “would need to see a really significant move up in inflation that’s persistent before we even consider raising rates to address inflation concerns.” As a result of this, the bank expects fund rates to remain unchanged in 2020.

The risk of a recession is set to dropGoldman Sachs Earlier this year, the bank’s economists put the risk of a US recession within the next 12 months at one-in-three. Now it’s cut the odds to one-in-five. “The current expansion is now the longest in US business cycle records dating to the 1850s, and some recession fears may simply reflect an instinctive sense that its time is nearly up,” the economists said. “This has not been an unreasonable thought historically, as the two usual late-cycle risks-inflationary overheating and financial imbalances-often did grow over time. But so far both risks look limited,” they added.

The 2020 electionBauzen / GC / Getty / Jonathon Ernst / Reuters Goldman says next year’s elections are “likely to be the single biggest event for financial markets in 2020.” The bank will be keeping a very keen eye on what happens in the next year. According to Goldman, it’s going to be a tight race. Usually the incumbent stays in office, it said, but “President Trump’s net negative approval rating makes the White House a close call, as prediction markets currently imply.” There could be changes for the Senate too according to the bank. “Prediction markets currently imply a 36% probability of a Democratic majority in the Senate. In light of the fact that outcomes of competitive Senate seats and presidential elections are correlated, this is probably also close to the implied probability of unified Democratic control.” If one of the four frontrunners for the Democrats does win the election (Bernie Sanders, Joe Biden, Pete Buttigieg and Elizabeth Warren) then Goldman says it’s likely the federal corporate income tax rate will be upped from 21% back towards 35%. Goldman says this will “reduce S&P 500 earnings in 2021 by 11%” if it goes all the way back to 35%.

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