Economy in uncharted waters leaves GovCon wondering

The U.S. economy is slowing but may not be heading for a recession. Congress and the White House have a budget agreement in place but no appropriations. And the debt just keeps getting bigger. So what should contractors expect next?

The U.S. economy is in uncharted waters with the usual indicators of activity all contradicting each other, which makes it difficult to predict the impacts on budgets, policies and other areas that the federal contracting market pays attention to.

That’s the conclusion of the economic portion of the Professional Services Council’s Vision Forecast. This annual analysis looked at several macro-economic factors such as Gross Domestic Product, international economic growth, the deficit and national debt, and unemployment.

The interplay of these factors often dictates whether the economy will grow, slow or head into a recession.

PSC has identified several levers that will have an impact on the federal budget, and among those is the global economy.

“As goes the world, so goes the U.S.,” said Peter Reif, volunteer for the PSC group that put together the overall economic forecast.

The U.S. economy is in an historically long period of economic growth, but a slowdown is underway and the possibility of a recession looms in the next 12 to 18 months. But it might not happen, adding to the uncertainty. A more precise prediction is hard because many factors are contradictory, Reif said.

The debt stands at 104.4 percent of GDP, the highest since World War II. By 2029, the U.S. will spend more annually to service the debt than it does on the defense budget.

The deficit continues to grow and hit $984 billion in fiscal year 2019, or 4.7 percent of GDP. Annual growth in GDP has slowed to 2 percent and is expected to drop to 1.8 percent.

But an economic positive is that unemployment is staying below 4 percent and is currently at 3.7 percent, and there has been little impact on inflation.

All of that adds up to mixed signals on where the economy is headed, Reif said.

The economy will likely slow but may not technically fall into a recession. “The most likely outcome will be a gradual economic slowdown with a gradual recovery,” he said.

In the shorter term -- fiscal 2020 -- there are multiple challenges. The government is operating under a continuing resolution despite the fact that Congress and the President have put the Bipartisan Budget Act of 2019 in place.

That law increased spending caps for 2020 and 2021 and did away with the threat of sequestration. The debt limit was suspended until July 31, 2021. There are no caps on discretionary spending.

But despite those positive parameters, Congress has not passed any appropriations. The current CR runs through Nov. 21 and Reif said the government could end up with a year-long CR.

He cited several reasons:

  • Congress and the President are distracted with impeachment.
  • White House has little to no leverage over Congress.
  • 2020 is an election year.
  • A year-long CR is effectively a budget cut and this White House likes more controls on spending.

What does all this mean for the budget?

The Vision Forecast identified three potential scenarios that could drive the budget going forward:

  1. The Dangerous World, which will see defense spending grow. Threats from North Korea, Iran, China and Russia increase. Civilian budgets will likely be cut.
  2. Budget Deal. The budget will line up with the current budget agreement, but no real budget growth after fiscal 2021.
  3. Economic downturn. Large deficits, inflation, more focus on domestic priorities. Civilian budgets likely to rise, less international engagement, lower defense spending.

PSC based much of its analysis on Scenario 2, which they admitted was the most optimistic scenario.

My conclusion from listening to Reif’s presentation is that the economy’s health is narrowly balanced and contractors will feel both direct and indirect impacts.

The direct impact is the impact on budgets -- Will they grow? Will they shrink?

I don’t see a huge impact on what the government will buy. That is dictated by agency missions and those aren’t changing.

But what I’m calling an indirect impact is the cost of doing business. Will interest rates rise? Will debt and financing become tighter? How will industry be able to invest? How will hiring and payrolls be impacted?

Only time will answer those questions.

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