The U.S. economy is resilient and begins the new decade with solid fundamentals. Global headwinds in 2019 which threatened to blow the economy off course were met with a reversal of Fed policy from 3 rate hikes to 3 rate cuts. This caused a turnaround in the residential real estate sector, gave a boost to interest rate sensitive sectors such as manufacturing, and helped the equity market turn in gains of near 30%. The current 3.5% unemployment rate represents a 50-year low. Steady employment and wage gains have buttressed the U.S. consumer, the backbone of the current expansion.

The question is, can this resilience last in the face of new headwinds such as Covid-19 (coronavirus)?

Though we believe the current late-stage expansion can go on for some time under the right conditions, a key caveat to our outlook is a negative demand shock created by the outbreak of the Covid-19 (coronavirus) in China. It has led to a stoppage of commerce resulting in a significant negative demand shock—China’s economy was in a near nation-wide shutdown for four weeks. We conservatively forecast that China’s GDP will grow at 4.5% in 2020 versus 6.1% in 2019.

Nevertheless, despite this headwind to growth in the first half of the year, recession risks are lower today than they were at this time last year. This is due to the liquidity impact both domestically and globally from the Fed’s rate cuts. At KPMG, we view the probability of a recession in 2020 at 35% compared to our previous forecast of a 45% chance 11 months ago. Naturally, this is all subject to change given the ongoing developments of Covid-19.

To learn more about the potential economic impact of Covid-19, please download our latest report, Fed Administered Economic Flu Shots; will they work?