Could US-Iran Tensions Drive Up The Risk Of A Recession?

Jan. 8--Uncertainty about the U.S. economic outlook for 2020, no doubt, has edged up after a U.S. drone strike on Jan. 2 took out a top Iranian military commander, Qassem Soleimani.

Early Tuesday evening, the White House confirmed that President Donald Trump had been briefed about an attack by Iran against an air base in Iraq housing U.S. troops.

The latest global developments are on top of the unsettling feelings that have been brewing for some time.

"Uncertainty is a tax," Diane Swonk, chief economist for Grant Thornton in Chicago, told a luncheon meeting of the Detroit Economic Club on Tuesday.

Overall, she said there has been a disconnect between CEOs, who are more cautious, and consumers, who are more confident.

For example, she said many business executives say they're going to hold the line on hiring in 2020 -- which is not a good sign.

Swonk had forecast a recession if the trade war continued, but now she is somewhat less pessimisstic after the latest progress toward a phase one trade deal with China.

"China is still the 800-pound gorilla in the room," said Swonk, who grew up in Livonia and earned her bachelor's degree and master's degree in economics at the University of Michigan.

Swonk noted that growth in China is slowing and that progress on trade would need to continue to avoid a recession.

"I hope we don't have a recession this year," she said, noting that she now puts the odds at 35% for 2020.

Last year, at one point, Swonk had thought a recession was likely in 2020 -- putting the odds at 55%.

Swonk has maintained that if a recession takes place in 2020, it would be mild and followed by a tame recovery.

As for the latest strife in the Middle East, she said there's a great deal to worry about when it comes to potential cyberattacks against the United States, including financial institutions, which have been targeted in the past. CEOs are already a bit skittish, Swonk warned.

"The fear factor is the biggest issue, and there's no model for that," she said.

Many economists in late December gave forecasts indicating that the U.S. economy seemed healthy enough to skirt a downturn barring unforeseen events, including some sort of economic shock, unexpected job losses or major trade war.

Right now, some are holding steady on the positive outlook overall even in light of the flare-up of geopolitical tension in the Middle East.

But it is clear that what Swonk calls an "undercurrent of unease" could deepen in the future.

After the 9/11 terrorist attacks, she said, the country found unity in various efforts, including a 0% financing launched by the automakers to encourage consumers to keep spending. Now, she said, the country is more divided and it's hard to predict any reactions, especially during a heated presidential election year.

"Half the country is going to feel cheated no matter what the outcome of the elections," Swonk said in a discussion with reporters after the economic club event.

The situation in the Middle East will remain something to watch, according to other economists, as well.

"Oil prices have climbed as a result," Robert Dye, chief economist at Comerica Bank, said by email Tuesday.

"The global glut of oil prevented a large price increase, but the oil market remains vulnerable to disruption," he said.

"Iran appears to be committed to responding to the killing of Qassem Soleimani, and we do not know what their targets will be or how that would further escalate tensions. At this time, I am assuming that the Iranian response will be limited in scope and will not pose a fundamental challenge to the U.S. economy," Dye said.

As a result, he said, he has not altered his forecast for ongoing moderate growth for the U.S. in 2020.

Dye is forecasting that the nation's gross domestic product -- the value of all goods and services produced in the U.S. -- will increase at a seasonally adjusted annual rate of 1.9% in 2020. That's cooling down from 2.3% in 2019.

Michigan business owners and leaders remain optimistic about the outlook for the U.S. economy and Michigan economy, according to the eighth annual Michigan Economic Outlook Survey, prepared by the Ann Arbor-based Baker Strategy Group.

The survey, which was conducted nationwide, included 295 respondents from business, nonprofit groups and government. It was released Tuesday at the Detroit Economic Club meeting.

Many of those surveyed in Michigan in late 2019 said the state had a "strong, vibrant economy." And they also said their economic region had a "forward-looking culture that embraces entrepreneurism" -- a five-year high.

Respondents said educational system in their regions need improvement overall, however. Many respondents also mentioned the need to fix the roads in the comment section.

Jeff Donofrio, director of Michigan's Labor and Economic Opportunity Department, told the audience attending Tuesday's economic club luncheon at the Motor City Casino Hotel, that the state needs big goals for post-secondary degrees.

"We know there's a huge skills gap," Donofrio said. He noted that states such as Tennessee and Kentucky are making more progress in addressing post-secondary challenges than Michigan.

He expects job growth to be about flat in Michigan, even though there are bright spots that were announced last year in the auto industry and elsewhere.

Contact Susan Tompor:313-222-8876 or stompor@freepress.com. Follow her on Twitter @tompor. Read more on business and sign up for our business newsletter.

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