‘A Very Resilient Economy’ -- Why Former White House Chief Economist Dr. Douglas Holtz-Eakin Is ‘Cautiously Optimistic’

Economist Dr. Douglas Holtz-Eakin spoke with CRN about his economic forecast, the upbeat 2020 forecast from the CRN BoB Conference CEOs, and why the broad consensus of CEOs fear a recession.

Dr. Douglas Holtz-Eakin, former chief economist of the President’s Council of Economic Advisors under President George W. Bush, is “cautiously optimistic” with regard to the economic outlook for next year. Dr. Holtz-Eakin, who is president of the American Action Forum, a Washington policy institute that has been critical of President Donald Trump’s trade tariffs, spoke with CRN about his economic forecast, the upbeat 2020 forecast from the CRN BoB Conference CEOs, and why the broad consensus of CEOs fear a recession. Here is an edited excerpt.

What is your view of the economic outlook for next year?

I think it is highly uncertain. Suppose you freeze in place trade policy where we are now, with the Federal Reserve policy where we are now and we don’t have any sort of unexpected adverse developments like oil interruption—things like that—then I think the economy is going to slow to something like 1.6 [percent] to 2 percent growth. That will be down a bit from now. And certainly below the peak of last year, but it won’t mean a recession, and we’ll get through 2020 in that fashion. If any of the negative developments occur—whether it is additional trade wars, trade measures, tariffs, things like that, bad luck on oil or other international events, our Federal Reserve policy loosening or tightening, whatever it might be—we could easily see recession in 2020. Not in 2019. But in 2020 it is a possibility.

What is the likelihood, then, of a recession?

Most formal models of the probability of a recession put it somewhere between 20 [percent] and 30 percent.

So do you think there will be a recession in 2020?

No. I think the probability is under 50 percent. That is the less likely possibility. I do think that we will have slow but positive economic growth.

Is the No. 1 issue that hangs over economic growth in 2020 the trade war?

I think so. Certainly, it has had a much bigger impact outside the U.S. than inside the U.S. We have seen a full percentage point decline in global trade. We have the two largest economies in the globe engaged in economic combat. That has been detrimental to everyone else. If that heated up again with new tariffs on both sides, that would be very bad.

What is it that you like and don’t like in the economy right now?

We have a household sector that is in good shape. Unemployment is low. Wages are growing. So people have a solid base of new income. They have been spending at a very solid rate—somewhere between 2.5 [percent] and 2.8 percent recently. That’s the strength of the economy. That is 70 percent of the economy. So that’s why I don’t think there’ll be a recession if that stays in place. ... The bad news scenario is when households get frightened or otherwise decide to stop spending. That is the way we could get back to everyone being on the same page with a slowdown. That is the negative scenario.

Are you surprised at how small the impact of the tariffs has been on the American consumer?

A little bit. There were a couple of months where consumer confidence declined sharply. I think it was July and they named the tariffs as the reason. That I felt was very concerning. But in the actual data the next month there was no slowdown in spending. There were very strong retail sales and personal income anomalies. They [consumers] have talked about how they don’t like it, but they haven’t yet changed how they behave.

What do you think of the data from CRN’s survey that shows 69 percent of BoB conference attendees don’t expect a recession?

That doesn’t reflect the broad consensus of CEOs. In all the CEO surveys for not just tech but for everybody, there is a belief by well over half that there will be a recession in 2020. Business confidence is lower than it was in 2016 when it was at one of its recent lows. CFOs feel the same way. The tech guys sound like they are a little different. They sound more optimistic than the average CEO. That makes some sense. Tech has been growing faster than the rest of the economy. They have sort of a little more momentum than the rest. But you still have 31 percent [in the survey] who think there is going to be a recession next year, and that is above what the data would say. So they are not super-optimistic.

Do you feel the administration has lost the confidence of CEOs and CFOs with some of the economic policies?

Yes, I do. There is no question they have on trade. I think 80 percent of what they are doing—whether it is tax policy or deregulatory efforts—they are absolutely 100 percent on board with what the administration has done. On trade I think they were cautiously optimistic. Now they have turned pessimistic. On attacking the Fed, I think they think that is a bad thing.

What do you think of President Trump’s attacks on the Federal Reserve?

Unwise. It does not help his case, which is to get re-elected. In the end, it just makes them more likely to resist things because it will look like they are bending to politics. He should just leave them alone.

If you had a few minutes with President Trump, what would you tell him?

I would tell him nothing because the things I want to tell him—like ‘Don’t use tariffs’—he has been told, and he doesn’t care.

What is your mood as you look into 2020?

l think this is a very resilient economy. It is continuing to grow. The fears are outsized compared to the data. So I am cautiously optimistic. There are things that I can see that could go wrong. If they do, it will have a big impact.