COVID-19 to precipitate US recession in 2nd quarter

The spread of COVID-19 to the US is causing a sharp contraction in spending on activities that involve travel and congregating in public. Given the speed of these developments, we are taking the unusual step of updating our base forecast for the US between scheduled releases. We now expect a recession to begin in the second quarter.

With global growth slowing sharply, financial conditions tightening dramatically, energy prices plunging, and "social distancing" forcing cancellations of sporting events, Broadway shows, dinner reservations, travel plans, conventions, etc., we now expect a sharp decline through June in "at-risk" personal consumption expenditures (PCE) on services to precipitate a consumer-led recession beginning in the second quarter and lasting through the end of the year.

The peak-to-trough decline in GDP is 2.3%, with the unemployment rate rising to 6% by mid-2021, and core PCE inflation slipping below the Fed's 2% objective.

This puts GDP growth for 2020, measured year-over-year, at -0.2%, and at +0.8% for 2021; the corresponding growth rates, measured 4th-quarter-to-4th-quarter, are -1.9% and +2.7%.

A recovery, starting in the first quarter of 2021, will be impeded by lack of monetary policy space and an inadequate fiscal response.

We anticipate that GDP will contract at a 5.4% annualized rate in the second quarter. With slowing global growth undercutting export demand, additional wealth effects from plunging equity prices, a drop in domestic production of crude oil and energy exploration, and induced multiplier effects from all of the above, a -5% print for second-quarter GDP growth doesn't feel like a stretch. Even as consumer spending begins to recover during the summer, the legacy effects of the second-quarter contraction of PCE, continuing declines in energy exploration and production, and weak overseas growth will result in negative growth of US GDP averaging about -1.9% (annualized) over the second half of the year.