As COVID-19 cuts through the economy, we're issuing this 2nd
update to our forecast published 5 March. It shows a sharper
contraction than the first update, with 2nd quarter GDP growth
plunging to -13%, GDP contracting 1.7% in 2020 (year over year),
unemployment approaching 9% by December, and inflation slipping to
1.3% in 2021.
In this forecast update, recovery from the looming economic
contraction begins in August, by which time we expect the rate of
new cases of coronavirus disease 2019 (COVID-19) to be dwindling
and quarantines, official and self-imposed, to be lifting. It is
not until the fourth quarter that a firm rebound takes hold. GDP
growth in 2021 is projected at 3.8% (year over year), but the
economy does not regain full employment until 2023. By the end of
that year, the stocks in the S&P 500 Index recoup recent
losses.
Below we detail recent developments that have been incorporated
into this update, and offer some closing thoughts on uncertainty,
risks, and societal costs:
- Foreign growth. Our country analysts have
issued another interim markdown in projected growth outside the US.
In this update, trade-weighted (by US export shares) foreign GDP
declines -0.2% in 2020 (measured year over year) as most countries
are projected to fall into recession. This compelled downward
revisions to our projections for US exports.
- Energy. Our energy team has revised further
downward its near-term projections of oil prices, showing the price
of Brent crude dropping to nearly $11 per barrel in the second
quarter before starting to rebound. This compelled another downward
revision in our projections of investment in mining structures,
which we now see falling 60% by the end of the year. Falling
gasoline prices provide only a partial near-term offset to this
collapse in energy-related investment spending.
- Consumer spending. We have deepened and
accelerated our assumed "shocks" to components of consumer spending
at risk to policies of social distancing, with declines by April of
between 40% and 90% in transportation, entertainment, gambling,
lodging, food away from home, and travel, with no recovery until
August and full recovery not until June 2021. There is a strong
substitution to food at home, but in that shift much of the value
added by restaurants is lost. This update shows personal
consumption expenditures falling at a 16% annual rate in the second
quarter before rebounding strongly in the fourth quarter. We're
closely following high-frequency data from trade associations with
an eye toward revising our assumptions as warranted. In addition,
with many retail establishments being shuttered, we've extended the
direct "hit" to expenditures on goods, both durable and nondurable.
Light vehicle sales fall 16% in the second quarter.
- Auto shutdown. The auto industry has announced
a temporary shutdown of production facilities at least through the
end of March. We assume the shutdown last several weeks into April.
This looks increasingly optimistic. Other industries are likely to
follow suit.
- Unemployment. Given the timing of the BLS
survey of establishments, job losses will not show up in the
official data until next month. When they do, we expect them to be
large and occur much faster than the usual relationship between
slowing GDP growth and a rising unemployment rate. Accordingly,
this update shows 7 million jobs lost in the second quarter. The
unemployment rate rises to 8.8% by the fourth quarter. We're
watching initial unemployment insurance claims for verification of
our assumptions. This week's claims showed the very leading edge of
the effect of the COVID-19 spread. Claims will jump very sharply in
the weeks ahead.
- Credit conditions. As unemployment rises and
amidst financial uncertainty, banks will tighten lending
conditions. In our modeling, this impedes housing starts,
particularly for multi-family units. Total starts decline 250,000
by the fourth quarter. We've also allowed for temporary 5% declines
in both state and local and private nonresidential construction,
with full reversal not until mid-2021.
- Initial financial conditions. The stock market
has fallen over the last week, volatility has increased, credit
spreads have widened, and the dollar has experienced some upward
pressure. We've adjusted the forecast to reflect these tighter
initial financial conditions.
- Monetary policy. While the Fed has resurrected
several credit facilities from the 2008-09 financial crises, and is
purchasing large amounts of Treasury securities in an effort to
maintain normal functioning in financial markets, we have not
changed our basic assumptions about monetary policy. The federal
funds rate will remain near zero for the foreseeable future. We do
not expect negative short-term interest rates. An aggressive move
towards QE remains a possibility.
- Fiscal policy. An emergency relief bill has
been enacted that CBO estimates will result in $7.6 billion of
discretionary outlays through 2030, but only $1 billion this year.
We have not yet included this in our forecast, but the amounts are
too small to make much difference. A second bill that would provide
for testing, unemployment benefits, and paid sick leave has passed
both chambers of Congress and we expect it to be signed by the
President. This has not yet been included in the forecast as we
remain uncertain about the cost of the legislation. A third bill is
taking shape in the Senate that likely will include financial
support in the form of loans or loan guarantees for affected
industries and, perhaps, cash payments directly to
individuals—the latter being a popular proposal. In this update
we do assume one-time cash disbursements of $500 billion to
individuals during the second quarter. However, most of these
payments will go to people who remain employed and therefore likely
will be saved. The rest will go to people who become unemployed,
and we assume they spend all of it over several quarters. The
resulting stimulus boosts second quarter GDP growth by less than a
percentage point. The federal deficit (as defined in the National
Accounts) spikes to nearly $3.5 trillion (at an annual rate) in the
second quarter, and rises to $1.8 trillion for this fiscal year.
Because most of the cash disbursement is saved, the personal saving
rate temporarily spikes to 21% in the second quarter.
Our forecast assumes that the shock to the level of consumer
spending traces out a steep drop in March and April, a flat valley
through July, and a gradual recovery from August to June of
2021...a hockey stick, or perhaps the Nike "swoosh". Yet even that
delayed and subdued recovery implies quite aggressive GDP growth
rates in the fourth quarter of this year (6%) and the first quarter
of next year (8%) before growth slows back closer to trend by the
end of next year.
Of course the uncertainty surrounding these projections is
immense. With events changing rapidly, this forecast update could
well be out of date by the time this note is read. Having said
that, it is easier to imagine further downward revisions to the
forecast than upward revisions. The shutdown in the auto industry
could last much longer than assumed here and spread to
manufacturing generally. With global air travel on life support,
our assumed rebound in Boeing shipments and production (will likely
be pushed back as orders are cancelled. The 2020 census could well
be delayed. Many retail outlets are closing, so sales of retail
goods could fall more than we assume here even if consumers make up
some of them with online purchases. Policies of social distancing
might not "flatten the curve" enough to prevent our healthcare
system from being overwhelmed. These are just some of the
imponderables.
Finally, we're starting to think about the economic costs of the
COVID-19 pandemic. One way to compute this is to cumulate the
difference between GDP in this updated forecast and GDP in the most
recent forecast that did not show significant effects of the
pandemic. Using this method we estimate that, over the next five
years, the pandemic will cost the economy $1.5 trillion (2012
dollars) in foregone GDP. In addition, the recession casts a shadow
forward on potential output, which remains slightly below the
pre-virus path for several years after 2024. Hence, the cost of the
pandemic continues to rise even after the economy regains full
employment, albeit at a much slower pace than during the recession
itself.
Posted 20 March 2020 by Joel Prakken, Chief US Economist and co-head of US Economics, Research Advisory Specialty Solutions, S&P Global Market Intelligence