Four key economic factors for 2020

KPMG Senior Economist Kenneth Kim shares his view on the U.S. labor market, corporate debt, China, and the Fed.

Webcast replay available

View the January 2020 webcast replay

View the January 2020 webcast replay

On our recent webcast, KPMG LLP senior economist Kenneth Kim shared his view on the outlook for the U.S. and global economies. Kim estimates a 33% probability of recession in the United States by the end of 2020, an improvement from the approximately 50% probability that had been forecast prior to interest rate cuts by the Federal Reserve and other global central banks during the course of the past year.

According to Kim, here are four key economic trends for directors to keep an eye on this year:

1.  The U.S. labor market: The U.S. economy is experiencing an 11-year expansion, its longest in history, as the unemployment rate sits at 3.5%, a 50-year low. However, one of the missing ingredients in this expansion has been productivity growth, resulting in slower wage growth than in previous economic cycles, putting a damper on inflation.  With the labor force growth rate slowing, a continued expansion hinges primarily on hopes for a pickup in productivity growth.

Demographics is a key factor in future growth expecations


2.   Corporate bonds: Business sector debt is near 75% of GDP, a peak last reached during the financial crisis of ’08-’09. Fueled by low interest rates, more than 50% of investment-grade corporate debt outstanding is currently rated BBB, the lowest rung on the investment grade ladder. And, over the next few years, several trillion dollars of U.S. corporate debt will come due, adding rollover risk to an outlook that already includes moderate recession risk. Losing investment grade status will make refinancing a challenge for some firms, particularly in a weaker economic environment. This will require a sharp eye on leverage and liquidity now, as well as protecting the balance sheet under stress scenarios. 

Business sector debt equals peak


3.  China: While China’s 6.1% GDP growth rate in 2019 would be the envy of many countries in the world, it is nonetheless the slowest pace of growth for China in nearly three decades. The pressure on China’s economy arises from both external and internal factors. The reaching of a “Phase 1” trade deal between the U.S. and China has ratcheted down tensions. However, trade risk between the two largest economies in the world has not been completely eliminated, as substantial U.S. tariffs on Chinese imports—25% on $250 billion in goods—remain in place. China, however, may have more challenges internally as the Chinese government attempts to wean its overleveraged economy from too much debt. Total credit to the private non-financial sector is in excess of 200% of GDP. Other countries that have approached similar excessive leverage ratios in the past have endured significant economic contractions and a critical loss of confidence from financial markets. 

Liquidity cannot go up forever


4.  The Federal Reserve: After three rate reductions in 2019, the Fed has communicated that it intends to keep rates steady in 2020. In the aftermath of the Fed’s easing moves in 2019, demand for dollar assets has waned as “risk-off” sentiment in the market has moderated. This is good news for emerging market economies (EMEs) as an overly strong dollar tends to impede capital flows to developing countries. Should the need arise for additional rate cuts—the fed funds rate is currently at 1.50% which doesn’t leave a whole lot of room for sizable rate cuts, be on the lookout for other nontraditional Fed moves and signaling

U.S. monetary policy has global and domestic feedback loops


Even with a reasonably optimistic economic outlook, businesses should be prepared. Our recent article provides critical considerations for boards as they assess a company’s ability to predict and manage through a downturn. 






* Survey of 189 directors, executives, and finance professionals during the January 16, 2020, KPMG Board Leadership Center webcast.

** Survey of 214 audit committee members, finance and internal audit professionals during the January 16, 2020, KPMG Board Leadership Center webcast.