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Strict "social distancing" mandates, supply chain disruptions
and sharp declines in the energy sector due to plunging oil prices
are resulting in a deep global contraction of uncertain depth and
duration. Production and employment in the US and global economies
are declining sharply in the second quarter, following a decline
that began in the first quarter. Social distancing has shut down a
broad swath of the global economy, and knock-on effects will impose
further economic damage. A gradual re-opening of the economy has
begun, limiting the decline in second-quarter production.
Massive and broad-based layoffs totaling over 30 million and
sharp declines in many asset prices imply an unprecedented
deterioration in household-sector economic wellbeing that further
restrains consumer spending in the near- and medium-term.
We assume the daily number of new
cases and deaths recorded nationally dwindle to low enough numbers
to permit a reasonably broad partial relaxation of social
distancing mandates by June. This will put the trough in economic
activity in the second quarter, when consumer spending is expected
to plunge at an astounding 43% annualized rate. In combination with
sharp declines in other components of GDP, this will result in an
unprecedented 37% annualized rate of decline in GDP in the second
quarter.
The employment losses will push the unemployment rate to 19.6%;
it would have been 6 percentage points higher but for unprecedented
declines in the labor force. Core PCE inflation is projected to
average about 0.7% over the next six quarters, and remains below
2.0% through 2025.
Thanks to quick cuts in the Federal Reserve's policy rate to
near zero, massive injections of liquidity and guidance to banks
for exceptional forbearance, credit markets continue to operate;
nevertheless, equity and bond markets have seen sharp declines in
prices. Equities are rebounding in the second quarter, following a
roughly 20% decline in Q1. Ten-year Treasury note yields are
projected to average below 1% for much of the next three years
before edging higher. Roughly $2.5 trillion in Federal rescue
packages will help stabilize the economy in the near-term and fuel
the rebound.
Posted 12 May 2020 by Chris Varvares, Vice President and co-head of US Economics, S&P Global Market Intelligence and
Joel Prakken, Chief US Economist and co-head of US Economics, Research Advisory Specialty Solutions, S&P Global Market Intelligence
We assume the daily number of new
cases and deaths recorded nationally dwindle to low enough numbers
to permit a reasonably broad partial relaxation of social
distancing mandates by June. This will put the trough in economic
activity in the second quarter, when consumer spending is expected
to plunge at an astounding 43% annualized rate. In combination with
sharp declines in other components of GDP, this will result in an
unprecedented 37% annualized rate of decline in GDP in the second
quarter.
