PHOENIX--Discussions of a downturn have been rumbling through the hotel industry for quite some time now, but Bernard Baumohl is not here for that nonsense--at least not yet. The chief global economist at The Economic Outlook Group gave his take on the direction of the economy at the 25th installment of The Lodging Conference, which is taking place this week at the JW Marriott Desert Ridge Resort & Spa after many years at the Arizona Biltmore.
“We’re now well into our 11th year of this economic cycle, the longest stretch of economic growth that we have ever seen in U.S, history,” he said. “But at the same time, we now have all these economic and political and geopolitical events swirling around and so the questions that I get asked most often is how many more blows can this aging business cycle take?”
But Baumohl said any discussion about the future of the economy has to begin with a look at the basics.
“If you look at the fundamentals of the economy, they still look great,” he said. Consumers are doing fine; the unemployment rate is still markedly low, the lowest we’ve seen in half a century; wages are still moving up; people are spending; inflation is still quiescent, borrowing costs are among the lowest we’ve ever seen; there’s ample capital looking for investments and there’s no doubt that technological innovations have fundamentally changed the way both consumers and businesses operate these days.”
All of these factors indicate that the economy remains in a great place, giving observers no reason to fret about the end of the good times.
“These are not the kind of symptoms that you see of an economy that’s approaching a peak that’s about to slip into recession. They’re not,” he said. “Nevertheless, there is this undercurrent of fear and anxiety that a recession is not only possible, but probable, next year.”
Setting the record straight, Baumohl said recessions actually are quite rare.
“First of all, it is extremely difficult for a $22 trillion free-market, open economy, a highly liquid economy, to actually fall into a recession,” he said. “What you need is a confluence of negative events of such magnitude that it ultimately derails the economy.”
Baumohl pointed out the events that precipitated the past few recessions: high real interest rates (which is not a problem the economy is dealing with now); geopolitical eruption that caused energy prices to spike, such as during the Yom Kippur War in 1973 (he doesn’t see this being a problem because “the dynamics of the whole oil industry have changed,”); and “acts of human folly.”
“It’s really acts of stupidity‑self-inflicted wounds,” he said. “The last two recessions have been [products] of that. You have the dot-com bust, which contributed to the downturn significantly, and what happened in 2008‑2009. It was a complete collapse. It was mismanagement, it was reckless lending and borrowing. It was just one big mess that led to the most significant downturn since the Great Depression.”
However, even though he’s not anticipating a recession, there are some issues that need to be monitored, he said.
“There are some very legitimate concerns,” he said. “First is the festering trade war that’s going on. The trade war is a huge foot on the neck of the economy right now. It’s affected the manufacturing industry, but it’s affected other industries, too.”
The second issue is interest rates, Baumohl said: “The problem right now isn’t that interest rates are too high. The cost of capital is not exceptionally high right now. It’s just simply the uncertainty, the alarm and the anxiety and the murkiness of the economic outlook that’s causing these economic problems.”
The final two concerns are the geopolitical climate, which he said needs to be watched, and the fact that the U.S. is in the midst of a political storm in terms of next year’s presidential election.
Future Performance
Baumohl gave three potential forecasts for next year based on various scenarios. The first, which he indicated had a 55 percent probability, is based on the U.S. and China coming to some kind of agreement on trade that cools tensions. This scenario would result in gross domestic product growth of 2.2 percent this year, 2.3 for 2020 and 1.6 in 2021.
The second forecast has a 30 percent probability, is based on the trade war escalating and some sort of geopolitical eruption. This would lead to GDP growth of 1.8 percent in 2020 and 2.4 percent in 2021. “That doesn’t really give us much of a bumper in the event of yet another shock to keep us out of recession,” he said.
Scenario three, with a 15 percent probability, begins with a comprehensive trade agreement, which Baumohl said would be “a major propellant for economic growth.” That could lead to 3 percent growth by 2021.